The inflationary environment that we are in, coupled with the supply chain, rising prices of food and energy, all has contributed to higher costs for about every economic resource. Interest rates are no exception. Interest rates are up one day down the next based on worldly and historic events. If you’re pre-approved for a certain price point here’s what you might want to consider as it relates to hedging your bets while waiting to get your purchase contract accepted.
Hopefully, you supplied the lender all paperwork asked. This includes letting them pull a copy of your credit report, providing pay stubs, bank statements, and if applicable tax returns. You’re pre-approved for a certain price point and that price point is based on a floating interest rate not a locked interest rate. Most lenders can’t lock in an interest rate until they have a loan and part of what creates a loan is the property address.
If your target payment for a mortgage is say $3,200 a month based on a 3.5% interest on a 30-year fixed rate mortgage and the prevailing 30-year market rate today is 3.99%. Depending on your amount financed that might move your monthly payment $20-$60. Here’s what you need to ask yourself, is a change in your payment by $20-$60 a month enough to cause you to not want to make an offer on that house? If so, you should pull back and rethink the notion of buying a house. Continue saving and work towards a better economic financial position.
You want to have about a $200 month buffer in your payment flexibility which will give you on average about $40,000-$50,000 of spending power. This should give you a competitive financial advantage. For example, which might be the difference between say a $550,000 house and a $600,000 house. These are all things that you need to weigh into the mix if you are maxed out on your debt-to-income ratio. You need to be in a higher offer position, or you might find yourself losing repeatedly because you’re trying to buy more than what your cash, credit, and income financial platform supports. A situation like this might be better to use more money to pay off debt. You can put less money down on the house, pay off consumer debt such as a car loan or credit cards that have high interest associated with them. Another option is a parent, or a grandparent might be able to give you additional money for a down payment, closing costs, or paying off some of that consumer debt. These are all ways to hedge against a choppy mortgage rate environment.
Here is why you must have flexibility in real estate. It doesn’t always go according to plan. The house that you want to make an offer on requires you having to increase your offer in a highest and best offer situation with competing offers. Which then will turn into a slightly higher mortgage payment. Or the house that you wanted to fell through and another one popped up, but the payment might be a little bit higher. These are things that you need to be able to position yourself for and just understand that it’s part of the broader process of getting pre-approved to purchase a home, get into contract, and successfully close escrow using mortgage financing in the process. One effective way to hedge against a rising interest rate situation is to pick a mortgage payment equal with the house that you want as a target. Then set yourself up for a max that you’re willing to spend. If it’s the right house, then work your way from there. That way you have a little bit of financial flexibility.
Interest rates and housing prices are going to move up or down regardless of whether you buy a home or not. Housing prices on average, despite the financial crisis from 2004-2008, have historically always gone up. Real estate supplies a tax shelter for you as you get to write off all your interest in taxes. It’s a hedge against inflation, it’s also a place that you could subsequently rent out in the future make income from and it is one of the main pillars of wealth for most families in America today.
If you can afford the payment at the end of the day that should be the number one driver of whether you decide to buy a house or not. Interest rate is important but it’s about the total monthly payment and how that total monthly payment aligns with your budget so you can still have a life and still save money. While at the same time enjoying all the bells and whistles of what homeownership has to offer.
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