The Federal Reserve this week delivered its seventh and final rate hike of 2022. In light of this, we are offering this updated column from Michelle Singletary’s archive, which originally ran Sept. 16.
Although mortgage rates dipped in November, the average monthly payment on the median-priced home is still 40 percent higher than a year ago, according to an analysis by Redfin.
With the Federal Reserve announcing its last interest rate hike of the year, I thought it was a good time to revisit an earlier column on whether now was a good time to buy a home.
Homeownership for many is the key to achieving the American Dream of prosperity. But if certain economic factors aren’t lining up for you, it makes sense to defer that dream.
“When it comes to home-buying advice in 2023, I’d urge prospective purchasers to consider the full picture,” said Ted Rossman, senior industry analyst at Bankrate and CreditCards.com. “Interest rates are part of it, of course.”
As the year comes to a close, I’m doubling down on my previous advice, which remains true no matter what the economy is doing or where mortgage rates end up in the new year.
So, here are five reasons it may not be the right time for you to purchase a home.
6 big answers for home buyers now that interest rates are soaring
Home prices are still too high
Though the housing market is showing signs of cooling down, it’s still too pricey for many families.
“One would think that higher rates would cause home prices to drop, but minimal inventory is helping to keep prices high,” Rossman said. “That’s good for current owners but difficult for someone looking to enter the market.”
In a hot market, you can buy too high and then be unable to sell your home at a profit if an economic downturn or recession causes prices to drop.
What the Fed’s interest rate hike means for mortgages
You need time to build a better credit history
With interest rates rising, you need to do what you can to get your credit score as high as possible. FICO, the scoring model most lenders use, ranges from a low of 300 to a high of 850.
Lenders consider your credit score in determining the interest rate and payment terms on a mortgage loan. The higher your score, the better deal you may get. Even a few points’ difference in your credit score can push you into a pricing tier that can raise the cost of your loan.
“A higher credit score helps ensure that you’ll qualify for the most affordable mortgage loan,” said Bruce McClary, senior vice president of membership and communications at the National Foundation for Credit Counseling.
McClary recommends aiming for a score over 700.
“It’s important to put your best foot forward with respect to your credit score, so look to correct any errors before applying, and clean up any other blemishes you can,” Rossman said.
Based on current rates, someone taking out a $300,000 mortgage with an 800 FICO credit score would pay $113,400 less than someone with a 630 credit score over the course of a 30-year loan.
7 ways to lower your credit card debt after the Fed rate hike
A high monthly mortgage payment won’t leave much cushion in your budget
The Fed has signaled more rate increases in 2023, which could increase mortgage costs for buyers. As of Thursday, the average 30-year fixed-rate mortgage stood at 6.31 percent, according to Freddie Mac. A year ago, it was 3.12 percent.
When qualifying for a mortgage, lenders allow for some debt. But the process doesn’t account for the money you need in your budget to save for retirement or a college fund for your child or children.
Calculate how much more mortgages will cost as interest rates rise
It will wipe out all your savings
If purchasing a home will clean out your rainy-day fund, you might want to rethink your timing.
If the economy gets worse and unemployment ticks up, you don’t want to be in the position of losing a job and not having enough savings to cover your mortgage and other expenses for at least a couple of months.
Will buying a home leave you little cash to cope with a big maintenance issue?
As a homeowner, maintenance and repairs are on you. If you want to keep up your property value or increase it over time, you have to maintain it and possibly spend a lot of money to improve it.
I’ll just get a home warranty policy, you might argue.
Many repairs will not be covered under your policy. And based on my own experience with various home warranty policies, having one doesn’t guarantee you will get your appliance repaired or replaced promptly.
Is a home warranty a waste or a smart buy?
“Warranty companies are the subject of thousands of complaints to consumer agencies,” according to a review by Washington Consumers’ Checkbook. It adds that and “even the most comprehensive plans include long lists of fine-print exclusions.”
Renting is working for you
The pandemic economy pushed rents up, prompting more people to consider homeownership to stabilize their housing costs through a fixed-rate mortgage.
But as the economy improves, rents are cooling, according to a report by Redfin.
“November also marked the third-straight month of single-digit rent growth following almost a year of double-digit increases,” the analysis found.
Rents are down year over year in 14 major metro markets.
“We expect declines to become more common in the new year,” Redfin economics research lead Chen Zhao said in the rental report.
Renting might be right for you — flexibility to move, little to no maintenance responsibility — but you may have a case of FOMO regarding homeownership. And why wouldn’t you?
We make people feel like they are financial failures if they don’t own a home.
Renting is often characterized as throwing good money away. The sooner you buy a home, the sooner you can become rich with home equity, is the money mantra you keep hearing.
But how do you tap that equity?
House rich, cash poor: Why a home-equity loan may not be a good idea
You either have to sell — then where will you live? — or you borrow against the home, which means taking on more debt.
The money you might have used to purchase a home or make home improvements could be invested in the stock market. If you want to invest in real estate, you can without owing a home. Consider investing in real estate investment trusts (REITs) or real estate mutual funds.
Also read: Going Online To Find The Right Title Loan
Yes, homeownership is one path to prosperity. But there are other paths, too.