A question, is it less or more expensive to purchase a home in this current rate environment? The pandemic brought challenges to the housing market with surging demand and outrageous prices. Now that the storm has passed, prices have started to correct but the cost of borrowing has increased dramatically. So was it better to buy then with low rates and high prices or buy now with higher rates and lower prices?
Surprisingly enough, the net effect on buyers’ monthly budgets is almost the same. We’re not talking about someone who’s potentially overpaid with negative equity and other compounding factors — that’s a problem. We’re focusing on the payment of someone who purchased early versus late last year.
In March of 2022…
- The average home price was just over $853K
- The comparative interest rate was 3.09%
In October of 2022…
- The average home price was just under $678K
- The comparative interest rate was 5.29%
Once a stress test of 5.25% is factored in, and assuming every other qualifying characteristic is the same, the person who bought in March has a monthly payment of $3,942 versus $3,951 for the person who bought in October.
Fixed vs. Variable
A question we’re hearing a lot in this current climate is whether to go with a fixed or variable mortgage. This question comes from two audiences; those who already own a home and those who want to own a home. If you’re looking to buy a home, the fixed versus variable debate is very much a personal decision based on your unique situation.
If you already own and you’re in a fixed rate, you may not be worried today but you should be concerned about the rates you’ll be renewing into. If you bought a house outside of the last year, the rate you’re going to be renewing into is likely three to four times higher than what you currently have.
Variable and Adjustable
If you’re in a variable or adjustable rate mortgage, you have seen your payments increase anywhere from 50-75% (maybe more) or your amortization period was greatly extended. So the question is, what do you do now? The easiest answer is to do what’s best for you today.
If you’re on a variable or adjustable rate and your payments are too high, make some type of change by switching to fixed, refinancing, or extending your amortization. Alternatively, you can stay the course because, historically speaking, this is a short-term pain for a long-term gain type of situation.
Fixed
If you’re on a fixed rate, you’ll want to start pretending your rate has already increased and start paying more. Figure out what you’d be paying at the current rate and start doing that or figure out increments that make sense for your situation.
By paying more now, not only do you pay down the mortgage quicker, you’ll re-invest less at maturity which will decrease the payment shock. If you start building that routine now, you’ll thank yourself later. It’s that old trick of rounding up your expenses to make sure you have enough… and then some more!
Contact the Kyle Miller Mortgage Agent team today to learn more about mortgage and financing options available to you!
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