One of the most significant financial decisions in one’s life is whether to buy a home or continue renting. With rising mortgage rates of late, this decision has become even more complex and nuanced. I recognize that many of the people reading my articles are already homeowners, but it’s an important topic even to those who already own a home.
Many current homeowners need to move but aren’t willing to consider it because they don’t want to buy a home with a rate more than double what they currently have. The allure of a low mortgage rate is undeniable. It’s a financial cushion that offers psychological stability and peace of mind. However, there comes a time when we must reconsider our options, especially when our current living situation no longer aligns with our needs and aspirations.
Life is ever-evolving, and our housing requirements change over time. My client’s story is a perfect example of this. While their current rental payment was manageable, it no longer accommodated their changing family dynamics and lifestyle.
They had been renting a home for the past three years at a monthly cost of $5,500, with an expected increase to $6,000 upon renewal. With a less-than-ideal credit score, he had been patiently waiting for it to increase, hoping for better mortgage terms. However, after a year of dedicated efforts, his credit score had only slightly improved. Meanwhile, home prices in their desired area continued to increase during this time. Waiting had cost them over $50,000 for the same house compared to a year ago.
Despite their weak credit and the higher interest rate they would face, my client decided to take the plunge and purchase a home. The potential to build equity, the lost home appreciation, and wasted rent payments all weighed heavily in their decision. They also saw the possibility of refinancing at a later date as a way to mitigate the impact of the initially higher interest rate. At worst, they are locking into a set price for the cost of their home. At best, mortgage rates drop, and they improve their overall payments down the road.
Homeownership is not just a financial transaction; it’s an emotional and psychological investment. It provides a sense of stability, belonging, and pride. Staying in a space that no longer meets your needs can impact your overall well-being. It’s important to weigh the practical, emotional, and economic benefits of a more suitable home against the comfort of a low mortgage rate.
If you are a homeowner living in a less-than-ideal location, the equity you are building won’t be as impactful as in a more favorable home or neighborhood. As a renter, you must ask yourself, “How much more rent am I willing to throw away for nothing?” Homeownership enforces a form of savings discipline, as each mortgage payment contributes to building equity. This “forced saving” mechanism can be invaluable, especially for individuals who find it challenging to save money consistently.
The fear of higher rates should not paralyze us; instead, it should motivate us to evaluate our options, consult with experts and make informed decisions. Seek guidance from professionals who can help you navigate this current market. They can provide insights into available options, including alternatives that can mitigate the impact of higher rates and align with your financial goals.
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
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