Should You Buy a Home When Mortgage Rates Are at Record Lows?
Almost every week, it seems that mortgage rates are hitting a new record low. Recently, rates have dropped all the way down to 2.88% for a 30-year fixed mortgage and 2.44% for a 15-year fixed mortgage. Those are the lowest rates ever recorded in the nearly 50-year history of the Freddie Mac mortgage rate survey.
Let’s put that in perspective. If you were to borrow $300,000 for a home on a 30-year mortgage at 2.88%, your monthly payment would be under $1,250 a month. In many areas of the country, $300,000 can buy you a very nice home.
This leads to the obvious question: if mortgage rates are so low right now, is this the right moment to buy a home, even without a 20% down payment?
Even in an era with historically low interest rates, the answer isn’t an automatic “yes.”
5 things to consider when buying a mortgage at low rates
Are you able to make the payments?
Right now, it is easier than ever to make payments on a home loan. Because interest rates are so low, your dollars go further than ever in terms of being able to buy a home. However, that does not mean that everyone is in the right financial situation to make mortgage payments.
A good rule to follow is that your mortgage payment should be less than 30% of your monthly income and your total debt payments should be less than 40% of your monthly income. Use that as the basis to calculate how much home you’re able to afford.
[Related: The Best Mortgage Rates]
Start by figuring out how much you bring home per year, then divide that by 12 and multiply that result by 0.3. That should give you the maximum monthly mortgage payment you can afford. If you have other debts, instead take your annual income, divide it by 12, and multiply the result by 0.4, then start subtracting out your other debt payments. You should use the lesser of those two numbers as your maximum monthly mortgage payment.
Are you also able to afford the other costs of homeownership?
Remember that a mortgage is not the only cost of homeownership. Your utilities will likely be higher. You’ll also owe property taxes. You will need homeowners insurance. You may also need to pay homeowners’ association fees. You’ll also need to pay for your home maintenance, and countless minor repairs.
This is why it is an excellent idea to stick closely to the calculations above when considering whether you can afford a home. If you have a mortgage payment above 30% of your income or total debt payments above 40% of your income, you’ll struggle to keep up with the other expenses of homeownership while also keeping food on the table, clothes on your back, and enjoying life.
If this is your situation, focus on getting your spending in order, paying down your current debts, and making positive career moves to improve your income.
Is it still significantly cheaper to rent in your area?
Depending on the availability and demand for rental properties in different areas, as well as the particulars of the housing market in different areas, you may find that you live in an area where rent is substantially cheaper than the cost of homeownership even with interest rates so low.
[Read more: The Best Renters Insurance]
What is your current rent? What are rental rates in your area? What kind of house are you able to afford with a similar mortgage payment? In some areas, a rent payment on a small apartment is equivalent to a mortgage payment on a nice home; in other areas, it’s not.
Know your rental market and your housing market before you decide.
If this is your situation, then you should be putting aside a healthy amount of money each month while renting for either debt repayment or saving for a future down payment.
Are there houses available in your market within your price range?
The next thing to consider is whether there are homes in your price range that you want to live in. Using the above calculations, you should have a good understanding of how much you can borrow. What homes are available in that price range, and are they places that you would want to live?
In some areas of the country, a $1,250 monthly mortgage payment gets you a nice home in a safe neighborhood. In other areas, it gets you a dilapidated tiny home in an unsafe area.
Identify what kind of home you would want to live in as a baseline, then figure out whether you can afford that home in your area by examining the local housing market.
Do you want to be a homeowner?
This is the final question, and it’s an important one. Being a homeowner means taking care of your repairs and maintenance. You have to mow the lawn, deal with broken appliances, fix toilets and much more to upkeep your home.
Some people relish these tasks and homeownership ends up being an empowering experience. For others, these tasks aren’t enjoyable — they’d prefer to just have a landlord deal with them.
Again, if you feel more comfortable in a rental because of these issues and not because of income, renting makes financial sense only if you accompany it with a healthy investment or debt repayment strategy.
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