Homebuyers

Interest Rates Are Important, But Don't Let Them Dominate the Bigger Picture

Despite the importance of interest rates and their direct influence on your monthly mortgage payment, rates should not necessarily be the deciding factor as to whether to buy now, later, or at all. There are bigger questions to ask:

Predicting the Direction of Interest Rates

Despite all the known factors that influence rates, such as the state of the economy, inflation, the job market, the housing market, Fed policy, what the 10-year Treasury is doing, etc., no one knows what interest rates will do tomorrow. What is known is that mortgage rates will likely rise or fall, so a better exercise is to prepare homebuying strategies for these various interest rate environments.

Rising Rate Psychology

If you know that a purchase – say, a house – will cost you more tomorrow than it will today, you will likely be more motivated to buy that house.

Yes, you could wait for rates to fall. Perhaps, you know someone who bought when rates were lower, making you think you should delay your buying decision. Buy low, sell high, right? But that strategy could be risky. Let's use stocks as an example. Say, you decide to buy ABC coffee at $50, even knowing some of your friends got in at $25. If the stock rises to $100, they certainly have greater gains than you, but you still did okay, too. If you sit out, hoping for falling rates and the reverse occurs, the opportunity could be more expensive.

Falling Rate Psychology

You can buy now, but fear rates are going to fall. In other words, that same house you want to buy today, even if the price doesn't change, will cost less to finance (smaller mortgage payments) if you just delay buying a little longer. In this scenario, you still face risks. The most obvious is, that rates could rise. Second, the home's price could rise, potentially canceling any discount you would have achieved had rates fallen. And, if you decide to buy now and your fears come true – rates drop – it's not the end of the world. You may be able to refinance to the lower rate.

Unchanging Rate Psychology

Sometimes, rates that move little or stay in a narrow range can seduce potential buyers into thinking they have ample time before they have to make a decision. What these people sometimes fail to realize is that their circumstances could change. If two people work, for instance, it may be easier to qualify for a mortgage, than if only one is working, perhaps because the other is staying home to raise a child or start a business. The point is, that circumstances change. If you have the means to qualify, this situation may be more important than which way mortgage rates are heading.

The Bottom Line

Rising rates or falling rates should not be the sole basis of whether to buy a home or not. They will play an important role in your homebuying decision, but there are many more factors to consider that you may regard as more important – and they're not all financial.

Freedom. You're the landlord, not somebody else. You're free to decorate and upgrade any way you like.

Predictability. Unlike rent, your fixed-rate mortgage payments don't rise over the years.

Equity. Money paid for rent is money that you'll never see again, but mortgage payments provide the opportunity to build equity in your home.

Appreciation. Like stocks or bonds, homes are assets. And like stocks and bonds, home prices can go up or down in the short term, but, historically, homes have shown steady appreciation.

Tax benefits. The U.S. Tax code lets you deduct the interest you pay on your mortgage, your property taxes, and some of the costs involved in buying a home. Consult with your tax/legal advisor.

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While interest rates play a major role in financing a home, they should hardly be the only factor influencing your decision to buy. Instead of trying to time which way rates are headed, perhaps you should ask, how much time am I willing to sacrifice not being a homeowner and missing out on the advantages it affords?