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Mortgage rates and home prices have skyrocketed over the past few years, making buying a home more expensive than ever. But with many buyers out of the market, those who remain may be able to get better terms. Homebuyers who buy now will likely have the opportunity to refinance to a lower interest rate in the next year or two.
Americans are very pessimistic about home buying right now.
According to Gallup's latest economic and personal finance poll, only 21% of people think now is a good time to buy a home — the lowest percentage since Gallup first asked the question in 1978.
Rising mortgage rates and skyrocketing home prices have made buying a home much more expensive than it used to be. But there are some unique benefits that come with this challenging market that might help you take the first step toward buying a home.
Why is it hard to buy a house now?
Mortgage rates have risen from historic pandemic lows and are more than 4 percentage points higher than when they bottomed out in 2021, according to Freddie Mac. The last time mortgage rates were this high was in 2002.
Although home prices fell slightly in the second half of last year, they remain relatively high and appear to be on the rise again, dealing a double blow to would-be buyers by making it more difficult to afford the property.
According to the U.S. Census Bureau and the Department of Housing and Urban Development, the median sales price for homebuyers in 2019 was $327,100, and the average interest rate on a 30-year mortgage was 3.74% at the end of the year, according to Freddie Mac.
A 10% down payment on that house would be $32,710, and your monthly mortgage payments would be $1,362.
As of the second quarter of 2023, the median home sales price in the U.S. was $416,100, and the average interest rate was 6.71% at the end of June. Based on these figures, a 10% down payment would be $41,610, and the average mortgage payment would be $2,419, more than $1,000 higher than the monthly payment on a home purchased in 2019.
5 Benefits of Buying a Home When Mortgage Interest Rates Are High
There's no perfect time to buy a home, and while the current situation is difficult, many Americans continue to buy homes out of necessity or because the timing is right for them personally. And many are noticing some silver linings in the current housing market.
1. Less competition
Rising mortgage rates and skyrocketing home prices have locked many would-be homebuyers out of the market, making them less likely to encounter bidding wars that drive up prices.
“Not long ago, open houses attracted double-digit attendance and forced buyers to make a very quick decision to secure a property. Often, buyers had to pay more than the asking price to secure the property, which often led to post-purchase regret,” says Sarah Alvarez, vice president of mortgage banking at William LaVais Mortgage.
With increased competition in recent years, most buyers will likely have to offer above the asking price to have their offer considered, but now that things have calmed down it may be easier to get your offer accepted.
2. Home prices generally rise over time
The sooner you buy a home, the sooner you'll be able to benefit from rising home prices.
While the market does experience downturns from time to time, home prices tend to rise over time, meaning homes become more and more expensive. By buying now, you can get ahead of the curve and watch your equity grow as home prices rise over the years.
One word of warning: you generally only benefit from rising home values if you plan to live in your home for the long term. It usually takes several years to break even on selling your home, and it could take even longer if home prices stagnate or decline for some reason.
But if you plan on staying in your home for at least the next 5-10 years, it may be worth buying.
3. Lower interest rates will help you beat the rush to buy
The race to buy a home may not be as fierce as it was during the COVID-19 housing boom, but if mortgage rates fall, the situation is likely to intensify significantly.
During a hot market, it's not uncommon for buyers to have to make multiple offers, or even dozens, before settling on one property. And to stay competitive, buyers often have to come up with more money or make significant compromises to get into the property they love.
Buying now will allow you to avoid unnecessary competition, and as a homeowner, you may benefit from increased home values as a result.
4. High interest rates prevent home prices from rising too quickly
“Higher interest rates tend to result in fewer buyers, less affordability factors and lower prices,” says Melissa Cohn, regional vice president at William LaVais Mortgage.
Home prices are down 0.46% year over year, according to the S&P CoreLogic Case-Shiller Home Price Index, and while they have inched up over the past few months, they are still below their peak in June 2022.
However, mortgage rates are expected to fall over the next few years. If rates fall, home buyers who have been patiently waiting for lower interest rates could flood the market. This would cause home prices to skyrocket.
This means that if you buy now, you're likely to get the best deal price-wise.
“It's better to pay more on your mortgage in a shorter period of time to get a better price on the home you want to buy,” Kohn says. “If you can save a few thousand dollars instead of paying a few hundred dollars more per month for a year or two, you'll be in a much better financial position.”
5. Refinancing in the future could lower your monthly payments.
“The strategy these days is to make lower monthly payments while knowing that there will be an opportunity to refinance if interest rates drop,” Alvarez says.
Even if you're paying a high interest rate now, you may be able to refinance to a lower interest rate in the next few years.
According to the Mortgage Bankers Association's latest forecast, mortgage rates could fall below 5% by the end of 2024. People who buy now could save hundreds of dollars on their monthly mortgage payments over the next year or two.
You can also reduce your monthly payments even further by refinancing to a longer term than you currently have remaining, such as refinancing to a 30-year mortgage.
If you are refinancing, be sure to shop around for the best mortgage refinance provider and get multiple interest rate quotes so you can get the best terms and the lowest monthly payment possible.
How to Know If You Should Buy When Interest Rates Are High
Buying a home in the current environment is extremely difficult, and for many, impossible.
“At the end of the day, the answer to this question is always personal. When I speak to clients, I usually look at the file holistically and try to give them the advice I would want to receive myself,” Alvarez says. “It never makes sense for someone to put themselves in a financially precarious situation and risk living in a home they can't afford.”
But if you're prepared and willing to make some compromises — like buying a smaller home or giving up certain features like an extra bathroom or garage — it's possible to use this tough market to your advantage.
Molly Grace
Mortgage Reporter
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