Oct. 4, 2022
Waiting for lower mortgage rates come with a cost!
Mortgage rates have been on the rise in recent weeks. This change in the market is having potential homebuyers facing questions as to what they should do next and when they should do it. Here's a breakdown.
First, understand that there is an impact on the purchasing power as the interest rates continue to rise. What is purchasing power? Well, purchasing power is the value of the American dollar expressed in terms of the number of goods/services that someone can buy. And purchasing power can weaken over time due to inflation and that's because rising prices effectively lower the number of goods/services one can buy. What's inflation? Simply put, inflation is the general increase of the goods/services in the economy. It's the reason that a cup of coffee in 2010 costed $1.25 and now is nearly $2. Or why, a quarter cannot buy a stamp anymore. (yes I'm old enough to remember those times) Inflation does go down. For instance, gas prices fell 7.7%. But inflation does not end, it just gets less bad as The Federal Reserve aims for a target.
What this means for mortgage rates?
The National Association of Realtors reported that the median home price was around 389K. Let's say a house costs 400K and a buyer wants to keep their mortgage to $2600 or below. The purchasing power will change as the mortgage rates rise (see chart). Red shows payments above that threshold and the green indicates payments within that $2600 range.
When will rates decrease?
Homebuyers that are waiting for the rates to lower may find themselves waiting for a while as The Federal Reserve attempts to control inflation. Renters that think they are safe to wait it out should consider that 7% interest rate is better than 100% rate when home equity is factored into the homebuying equation. Because homebuyers can cash in on the equity in their homes but renters cannot. Also, the rise in rates has increased the rent prices which have seen the highest increases in about 40 years.
What makes more sense for you?
Each person's situation is different. Potential buyers should sit down and talk with a Realtor and the Realtor's mortgage broker team to discuss what are the homebuyers options.