As mortgage rates rise, here’s how to decide whether you should buy a home or rent

Real Estate

Tim Kitchen | The Image Bank | Getty Images

It’s becoming harder to afford a home.

Prices are up almost 20% year over year, and mortgage rates are soaring.

The rate for a 30-year fixed loan is now 5.57%, according to Mortgage News Daily, up from 3.29% at the start of the year.

At the same time, consumer prices on everything from gas to food are also accelerating, costing Americans hundreds of dollars more in spending a month. In an effort to tamp down inflation, the Federal Reserve raised interest rates on Wednesday by half a point.

Mortgages rates don’t directly respond to Fed rate hikes on short-term rates, since the former is based on longer-term rates, such as the 10-year Treasury yield, explained Greg McBride, chief financial analyst at Bankrate.com.

More from Invest in You:
Rising rates, inflation, market volatility: How to manage challenging times
How to know if an adjustable-rate mortgage is right for you
When to up your home-buying budget or stick to your original price

However, he foresees the possibility of some pain ahead for homebuyers.

“Until we see sustained evidence of inflation pressures moderating, the risk is very much toward higher mortgage rates,” McBride said.

“But when we do see inflation pressures ease, mortgage rates could reverse course quickly — especially if the economy is slowing, too.”

Meanwhile, rents are also rising.

“If you’re not sure whether or not you want to rent or buy right now … it’s better to make your decision based on your personal situation and your personal needs,” said Lexie Holbert, housing and lifestyle expert for Realtor.com.

Take these steps before making a decision whether to own a home or rent.

Do a financial checkup

Ask yourself if you are financially ready to own a home. That includes having enough emergency savings in case something happens in your first year of homeownership, Holbert said. You should also have enough monthly income to afford the mortgage payment, taxes and insurance, as well as extra monthly expenses like utilities.

Check your credit report, as well, since your credit score has a direct bearing on the mortgage you’ll get and interest rate you may pay. If you see any mistakes, have them corrected before you apply for a loan.

If you can’t afford the monthly payments, continue to rent and keep saving money if homeownership is your ultimate goal, Holbert said. If high rent prohibits you from saving, consider downsizing or making other big lifestyle changes so you can start putting more money aside.

“You’ll read that if you cut back on your $4 latte habit, it could really help you save for a home,” she said.

“While it’s really good to save, where you’re really going to find that big cash for that down payment is going to be in those big spending categories, like housing or your car.”

Assess your timing

Think about where you are in your life. Are you looking to settle down somewhere for a while or will you be moving in a couple of years?

The general rule of thumb is it takes about five years to seven years in a home to recoup the purchase costs, Holbert said. That includes closing costs, which add between 2% and 5% to the purchase price.

“If your home needs are going to be pretty consistent and pretty stable over the next few years, now may be a really good time to buy for you,” she said.

“If they’re changing, you may want to consider renting so that you have the flexibility to move.”

Set a budget

Getty Images

Figuring out what you can afford if you were to purchase a home is especially important now as home prices are rising, said Bankrate’s McBride.

This way, you have boundaries set around your home shopping.

“The position you won’t want to be in is falling in love with a home and getting your offer accepted and then having to figure out how to pay for it,” he said.

Check out homes in your price range on sites like Realtor.com or Zillow to determine if they fit your needs.

You can also use online calculators to help you make a financial determination between renting and buying, including those from SmartAsset, NerdWallet or Realtor.com.

Also, keep an eye on rising mortgage rates.

Just don’t get caught up in FOMO — or the fear of missing out. That could lead you to regret your purchase and put you in a financial bind down the road, McBride said.

“The novelty of that house will wear off; the mortgage payments will not,” he said.

SIGN UP: Money 101 is an 8-week learning course to financial freedom, delivered weekly to your inbox. For the Spanish version Dinero 101, click here.

CHECK OUT: I generate thousands of dollars a month in passive income teaching online classes: Here’s how to get started with Acorns+CNBC

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

Products You May Like

Articles You May Like

Cyber event cited in Palomar Health ratings falling further into junk territory
The Fed cut interest rates but mortgage costs jumped. Here’s why
Hospitals could be hurting if Trump, GOP slash Medicaid
Common reserve bond funds spurring investment
Record $600bn pours into global bond funds in 2024

Leave a Reply

Your email address will not be published. Required fields are marked *