I’m sure you’ve heard, but mortgage rates are still rising. It’s causing some would-be buyers to pause their decisions until they determine whether rates are going to come back down. It may be possible, but the probability is that prices are going to continue to increase.
According to Freddie Mac, the 30-year fixed-rate on December 23, 2021 was 3.05% and is at 6.29% as of September 22, 2022, a 3.24% increase. On a $360,000 mortgage, the principal and interest payment went from $1,528 to $2,226. The $698 difference represents a 46% increase in the payment.
It would seem like a good idea to pause and see if rates will come down again, especially since they went up so fast, but it probably isn’t going to happen anytime soon based on the Fed’s position on controlling inflation.
It’s a fact that the inventories are slightly growing, and market times are increasing doesn’t negate that supply cannot keep up with demand and homes are continuing to appreciate, albeit, not as much as they did in 2021.
If a person waited a year to see if the rates come down but, in the meantime, the prices increased 10% and the rates stayed the same, the home in the example above, would have a $226 larger P&I payment.
As an alternative strategy, the buyer could purchase the home on a 5/1 adjustable-rate mortgage with a 4.64% rate for five-years. Instead of $2,226 for the P&I payment for the fixed rate at 6.29%, the payment on the ARM would be $1,926, a $300 savings.
With that alternative strategy, they would have purchased the home at today’s prices, avoiding appreciated prices and would have five years to refinance at a lower fixed rate should they come down. Assuming the rate adjusted upward the maximum amount at each period, it would take over seven years to exhaust the savings on the lower payments for the first five years.
What is unfortunate is that some buyers missed a window of opportunity to purchase last fall when mortgage rates were near an all-time low. That window has closed, and unfortunately it may not open again. People who can still afford to buy, even though rates are significantly higher, are taking a risk waiting for rates to come down. Even if they are correct, the prices will be higher, offsetting any possible savings.
If they are wrong, both prices and rates will be higher, and they may be priced out of the market.
There was a time in the 1980s when mortgage rates topped 18%. During that time, the best real estate agents in the country presented alternative financing choices to buyers. If your agent hasn’t had conversations with you about alternatives to fixed rate financing, there could be options available that you need to consider.
Depending on your price range and individual situation, investigate local and state financial assistance programs, ARM Comparison, 2/1 Buydown, and Cost of Waiting to Buy and download our Buyers Guide.
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