Interest rate hysteria; can you buy now?

Interest rate hysteria; can you buy now?

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Deciding to buy a house can be an exhausting and expensive adventure. Today, mortgage rates complicate this even more. Do you know how much house you can buy? Keep reading to find out!

Find a house that meets your needs

Before doing anything else, examine your needs and see what you can and cannot live without. Things you need to look at are location, school district, age of the home, bedrooms/bathrooms, yard space, heating/cooling efficiency, finishes, swimming pool, hot tub, etc. Yeah, I know… that’s a lot to consider.

Take your time and make sure you’re getting the best house for YOU. No one else can tell you what you need.

The price is right

Or not. It’s 2022, and if you’re currently house shopping, you’ve probably lost some purchasing power compared to the December/January timeframe and even more since the onset of Covid-19.

Since January of 2022, mortgage rates have been steadily on the rise. As you can see in the chart below provided by FreddieMac, the 30-year fixed rate climbed from less than 3% to more than 5% in only five months. Oh yeah, housing prices have also steadily climbed since March of 2020 as well, so you’ll have that to deal with.

Don’t start crying immediately, there is some good news. In 1981, interest rates hit 16.63%. Yikes. Thankfully, we’re nowhere close to that!

What this means for your mortgage

In short, this means that your mortgage is woefully more expensive. How much, you might ask? Well, let’s see a simple example on a $300k home purchase.

In January, you could have scored a 2.75% rate for 30 years. On a $300k mortgage with 20% down, this would equate to a $979 payment. Not too bad, right? Keep in mind this doesn’t include property tax or insurance payments, which will be included in your mortgage payment to fund your escrow account.

Now, let’s say you couldn’t find the house for you until May of 2022, where you could only lock a 5% rate. Your payment would now be $1288. This is a difference of $309 a month, for life. Emphasis: FOR LIFE!!!!!

That’s right, delaying 5 months cost you $309 per month for life, OR, $111,240 over the course of the loan. I don’t know about you, but for me, that’s a lot of money!

Moral of the story: Interest rates matter

So how much house can I actually buy?

Okay, we’ll get to the good stuff now. This article has probably scared the living daylights out of you. But just know, the hard part is done. Now that you understand the significant impact that interest rates can have on a mortgage, you can start budgeting for your purchase.

Here at Wealthy Idiots, we would recommend taking a mortgage equal to 25% of your gross monthly income or less. You’ll also need money for a down payment. This is largely dependent on your personal circumstances, as there are programs for lower-income individuals. The typical down payment will range anywhere from 3 to 20% for most people.

EXAMPLE: you have an income of $60,000 per year. This equates to $5,000 per month. 25% of this is $1250. Don’t forget – property taxes and insurance need to fit within this number as well. So ideally, you’ll want a mortgage payment of around $950-1,000 before those are added in.

Now, can you go over this safely? I’m sure. Plenty of people have been borrowing up to 45% of their gross monthly income for years. If you want proof, take a quick look at the 2008 housing crash, or check out the movie The Big Short starring Brad Pitt. This movie covers it all and you certainly won’t be disappointed.

Other considerations

Honestly, this is a lot more simple than most “financial bloggers” and “industry experts” will make you believe. It’s really about keeping your housing costs reasonable compared to your gross monthly income.

Keep in mind there are extenuation circumstances that need to be considered. Are you 45 years old with no retirement savings (click here for help!)? Do you have a grandparent or parent you need to care for? Will you have roommates in perpetuity? All of these things can tilt the scale, either for, or against borrowing more money. Deciding what is reasonable is up to you.

Author

  • D.C. joined the Marine Corps right out of high school. When he left active duty after 5 years of service, he quickly earned a bachelors degree and an MBA. He got his first private sector job at a modest salary and quickly worked his way up through promotions. Once he started making decent money ($38k at the time), he quickly realized he needed to learn how to save for his future. After nearly ten years of research and application, he wants to share his knowledge and financial best practices so more people can become Wealthy Idiots!