How to make the buy vs. rent housing decision as mortgage rates surge

With mortgage rates rising, more people may be asking themselves the age old question: rent or buy? 

These decisions are particularly pertinent amid bubble-like housing prices, making monthly mortgage payments more difficult to manage, and also sky-high rents that have proven to be one of the economy’s stickier forms of inflation.

The latest Federal Reserve interest rate increase, while not directly tied to mortgage rates, is having some effect on lending and home prices. And the Fed isn’t done raising rates yet this year.

The average 30-year fixed-mortgage rate was 6.10% as of Sept. 13, according to Bankrate.com, and it has been rising steadily, up to 6.43% on Tuesday, according to the mortgage rate comparison service, after the Fed’s most recent decision last week to raise its benchmark interest rates by another three-quarters of a percentage point — the third-time in a row it has raised rates by that amount.

More homebuyers are pulling out of deals given the environment. Here’s how to weigh the biggest housing decision you may ever make in your life.

Take a big-picture approach

Cory J. Phillips, a financial advisor at Pittsburgh-based Fort Pitt Capital Group, said he’s heard from clients that they are concerned about buying now because of rising rates. But rates are only one consideration when it comes to buying a house. 

Although they are higher than the recent past, rates are still among average levels over the last 30 years, he said. “The last couple years we, as consumers, got used to such a low rate. Now it’s our expectation,” he said. 

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Trying to time the rate market isn’t wise, Phillips said. If the buying elements are right for you, it could still make sense to buy, even as rates are rising.

But before plunking down money on a down payment, consider what the next few years could look like. Are you interested in planting roots, or is there a strong chance you’ll relocate in three to six years? If the latter is a possibility, Phillips said he wouldn’t generally advise buying now because the closing costs and commissions are likely to negate the benefits. 

Rent premium versus ownership premium

Sure, renting is expensive. From 1985 to 2020, the national median rent price rose 149%, while overall median income grew just 35%, according to an analysis of publicly available data by Realestatewitch.com.

But homes are also pricey, even though they fell 0.77% from June to July. That’s the first monthly decline in nearly three years, according to Black Knight, a mortgage software, data and analytics firm, and prices have softened significantly in recent months relative to historical data. But the median price of an existing home sold in August was $389,500, still up 7.7% from a year ago.

Prospective buyers need to remember that the premium they are paying in rent is temporary, said Karl A. Wagner III, partner and senior wealth advisor at Milford, Pennsylvania-based Biondo Investment Advisors. “The premium you are paying to buy is not temporary; it’s a long-term commitment,” he said.

So in the least, do not force a decision to buy if your financial situation provides good reason to be more deliberate.

Determine whether you have enough money for a down payment or might you be better off delaying a purchase until you do. Phillips offers the example of a client who is looking to buy a house in the $200,000 to $275,000 range. He’s now saved enough to put 15% down, which would mean he would only have to pay private mortgage insurance for a few years — a form of mortgage insurance often required by lenders if the buyer does not initially have 20% for a down payment. He can continue to save until he finds his dream home, getting closer over time to the 20% mark that would allow him to avoid private mortgage insurance.

Moving and other miscellaneous costs

Moving, whether to a new rental or newly purchased home, has its costs.

Prospective buyers need to make sure they have enough set aside not only for moving expenses but also for home maintenance — initial and ongoing. These costs aren’t necessarily a drop in the bucket. The average cost of a local move is $1,250 and $4,890 for a long-distance move, according to Moving.com.

What’s more, “there are almost always costs that you forget to include in your move, and those you did add are usually expensive,” said Courtney Klosterman, home insights expert at home insurance provider Hippo.

And in addition to hiring movers and home repairs, homebuyers need more money set aside for buying new items and furniture. Additionally, if there is a gap or overlap between moving, buyers may have to pay double the mortgage or stay in a hotel until their new home is move-in ready.

Your income and personal financial security

Would-be buyers should also consider how their financial picture could change in the near-term, said Gregory W. Lawrence, certified financial planner and founder of Lawrence Legacy Group in Estero, Fla. What happens, for example, if a spouse wants to stay home to raise the children? Or what if one of you gets laid off? Can you afford to live on one income? Also consider the source of your income? Is it secure in a recession? And what’s your future spending likely to be?

“Don’t buy at a peak, get laid off and not have the money to pay for a house that you just put a bunch of money in and is now under water because the market declined,” Lawrence said. 

If you have a great buying opportunity, but are concerned about your finances, it could make sense to put down a smaller deposit, even though it will mean private mortgage insurance, Lawrence said. “I would not be putting 20% on a house unless I had enough assets that I was assured I would never lose the house,” he said.

Wagner strongly recommends first-time house buyers wait out what he sees as a bubble destined to pop. He cautions people to remember the housing crisis of 2008 and how many people took major losses on homes purchased at the peak. “I fear that we’re in a similar situation where excessive speculation and excessive liquidity and low interest rate have led to this real estate boom,” he said. 

“We know historically that nothing goes in one direction forever. If it’s possible for you to wait, I would.”

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