Rethinking High Interest Rates
This past week interest rates for a 30-year mortgage went above 7% for the first time in recent memory. That alone would be shocking, but it is even more shocking considering that less than a year ago it was possible to get a mortgage for around 3% interest.
When compared to the 3% interest rate of a year ago, a 7% interest rate will add hundred of dollars to your monthly mortgage payment.
Of course the media has jumped on the increase and shares with us stories of buyers who can no loner afford to buy a home because of the increased monthly payments, and sellers who are struggling to sell their home because there are fewer buyers out there.
There is certainly truth to these things. Higher monthly payments will certainly push buyers out of the market, at least until interest rates go back down. Some sellers will not get the ridiculous offers their neighbor’s have gotten in the past couple years as the buyer pool shrinks.
As a real estate agent and a notary signing agent (I see hundreds of mortgage transactions a year), I’ve been challenging people to rethink some things, primarily how much home do they need?
When buying a home, it’s very common for a mortgage banker to tell a buyer how much of a loan they qualify for, and for an agent to use that number as a basis for a home search.
When people qualify for a $300,000 mortgage, they tend to go looking for a $300,000 home.
But I encourage people to consider if they really NEED a $300,000 home!
Just because the bank says they will give you $300,000 for a home doesn’t mean you have to take it.
Getting caught up in the hype and the emotion of buying a home is easy and it’s fair to say that many $300,000 homes are nicer than many $200,000 homes (although not always).
But what if you detach yourself from the emotion (and your mortgage broker’s constant phone calls)?
How much house do you really need? Do you want to pour every last dollar into your home leaving you with no headroom at all (financially).
More to the point, if the 7% interest rate makes a $300,000 home unaffordable, why not consider buying a $250,000 home, or even a $200,000 home?
Again, just because the bank will give you $300,000 doesn’t mean you have to take it!
Of course there are many variables to consider, but in many cases most people could find a lesser-priced home with which they would be perfectly happy.
The companies who lend us money love to push us right to the top. If you go to buy a car, the salesperson will take you right to the car at the very top of that range. Do you need a brand new car, or would a two-year-old car, with a much smaller price tag be sufficient? You can guess the salesperson’s answer to that question.
Your mortgage broker and your agent will tell you to look at those $300,000 homes. Why shouldn’t they? They all benefit from you buying a $300,00 home more than a $200,000 home.
While 7% interest rates will certainly price some people out of the market, I offer the opinion that many more people are pricing themselves out of the market because they want to spend every single dollar the bank will lend to them.
If you really want a home and interest rates are too high, find a less expensive home!
And let’s not forget, interest rates will come back down again. No one has a crystal ball to predict such things, but some very smart people, who make a living watching such things predict that interest rates will fall in 2023 (which is only a couple of months away).
It hurts that interest rates are more than double what they were a year ago and that is going to cause some people to put their home search on hold.
But for many, it’s also an opportunity to evaluate what they really need and how much they want to spend to get it.