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Is now actually the best time to buy a home? Here are 3 perks of making a purchase when interest rates remain stubbornly high...
While there’s speculation as to whether interest rates will continue climbing, level off or start to decline in the coming months, many potential buyers are left wondering if they should wait it out or jump in.
The downsides are obvious: For buyers, a higher rate translates into higher monthly payments, which affects overall affordability. For a median-priced home, recent rate hikes have added $300 to $400 to the average mortgage per month.
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Plus, it may be more difficult to get approved for a higher loan, so that dream home may be just out of reach.
That being said, there are a few surprising advantages of a cooler market. Here are three reasons to consider buying when interest rates are high.
Lower housing prices — in some markets
Higher interest rates typically have two effects on the housing market that can help drive down prices: They price some buyers out of the market, and they put downward pressure on housing prices, which are both good for the buyers who remain in the race.
But, while home prices started to decrease — albeit modestly — earlier this year, prices have since risen. That’s because, despite higher mortgage interest rates, housing inventory remains limited. Some sellers are choosing to stay put so they can hold onto their low locked-in rate, while new home construction continues to be negatively impacted by supply chain issues, rising costs and labor shortages.
In fact, housing prices rose 5.5% between the third quarters of 2022 and 2023, according to the Federal Housing Finance Agency House Price Index (FHFA HPI). However, different parts of the country are seeing price declines, including Hawaii and the District of Columbia. Which means while housing affordability may still be out of reach for some buyers in certain states or regions, in others, buyers may be able to negotiate better prices.
Less buyer risk
In 2020-2021, it was a seller’s market, and buyers were chasing a limited supply of housing inventory. Highly desirable homes were selling the day they hit the market — often with multiple offers pushing prices well over listing price.
That meant a lot of buyers were waiving offer contingencies. Why? Because offers with fewer contingencies present a better chance of being chosen by the seller.
However, among the contingencies being waived were two important ones: the inspection and the appraisal. That put buyers at risk of purchasing a money pit, or losing money if they back out of the deal after discovering potential problems.
When rates are high, there are fewer buyers to compete with and houses tend to stay on the market longer, so inspection and appraisal contingencies are re-emerging.
Read more: Millions of Americans are in massive debt in the face of rising rates. Here's how to take a break from debt this month
For some, buying a house is a financial investment. For others, it’s a place to set down roots. Regardless, if you’re ready to own a home, purchasing sooner rather than later means you can start building equity now — even if that means you may have higher costs in the short term.
After all, there’s no guarantee that rates will drop any time soon. So, if you don’t want to put your life plans on hold — say, to move to another city for a better job, or to be closer to an aging parent — then it may not make sense to wait. And, if you’re currently renting, you’ve probably seen your rent increase, so you may prefer to build equity in your own home rather than pay higher rent.
Buying a home while interest rates are high
It’s natural to think of rising interest rates as bad news for homebuyers. After all, higher rates mean higher monthly payments, while taking on the same amount of mortgage debt.
But that doesn’t mean there isn’t a silver lining to buying when rates are high. There’s likely to be less buyer competition for the home you want, plus the potential that higher rates will provide downward pressure on sales prices.
And you can always refinance when rates come down again, provided that your income and credit score remain strong. Or you may want to consider taking out a variable-rate loan to start with, so you can potentially lower your rate over time without having to take out a new loan and paying closing costs.
If you can wait at least 12 to 24 months to purchase your home, that might not be a bad decision. If inflation has subsided by then, the Fed is likely to begin reducing interest rates. At that point, home prices may be slightly lower than they are today, while interest rates may be similar.
But there’s no guarantee if and when rates will drop. And if they do drop, there will be plenty of pent-up demand, which could lead to more competition and more bidding wars. Weighing the above benefits can help you make the best decision for your needs.
The bottom line? If it’s time to move, don’t let higher interest rates put your home buying plans on hold.
Story by Vawn Himmelsbach — with files from Ruth Lyons
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