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

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

These decisions are particularly relevant given bubble-like real estate prices that are making it difficult to manage monthly mortgage payments, and sky-high rents that have proven to be one of the economy’s most persistent forms of inflation.

The Federal Reserve’s recent rate hike, while not directly related to mortgage rates, is having some impact on lending and home prices. And the Fed isn’t done raising interest rates this year.

According to Bankrate.com, the average 30-year fixed-rate mortgage rate was 6.10% as of Sept. 13, and it’s been rising steadily, up to 6.43% on Tuesday, according to the mortgage rate comparison service, after the Fed’s peak of the latest decision last week to raise interest rates by another three-quarters of a percentage point — the third consecutive hike by that amount.

Given the environment, more and more homebuyers are pulling out of stores. Here’s how to weigh the biggest living decision you could ever make in your life.

Take a holistic approach

Cory J. Phillips, a financial adviser at Pittsburgh-based Fort Pitt Capital Group, said he’s heard from clients that rising interest rates are making them concerned to buy now. But prices are just one consideration when it comes to buying a home.

Although higher than in the recent past, rates are still below average levels over the past 30 years, he said. “In recent years, we as consumers have become accustomed to such a low rate. Now it’s our expectation,” he said.

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

But before you spend money on a down payment, consider what the next few years could be like. Are you interested in putting down roots, or is there a high chance you’ll be moving in three to six years? If the latter is a possibility, Phillips said he generally wouldn’t advise buying it because closing costs and commissions likely outweigh the benefits.

Rental premium versus ownership premium

Of course, renting is expensive. From 1985 to 2020, the national median rent increased 149%, while overall median income increased just 35%, according to an analysis of publicly available data from Realestatewitch.com.

But real estate is also expensive, despite falling 0.77% from June to July. According to Black Knight, a mortgage software, data and analytics company, this is the first monthly decline in nearly three years, and prices have come down significantly in recent months compared 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.

Potential buyers need to remember that the premium they pay for the rent is temporary, said Karl A. Wagner III, partner and principal wealth advisor at Biondo Investment Advisors of Milford, Pennsylvania. “The premium you pay for the purchase isn’t temporary, it’s a long-term commitment,” he said.

So at least don’t force a purchase decision if your financial situation gives cause for more consideration.

Determine if you have enough money for a down payment or if you should wait until you have made a purchase. Phillips provides the example of a client looking to buy a home in the $200,000 to $275,000 range. He’s now saved enough to put down 15%, which would mean he’d only have to pay for personal mortgage insurance for a few years — a form of mortgage insurance often required by lenders if the buyer doesn’t initially put down 20% for one deposit has. He can keep saving until he finds his dream home, and over time is approaching the 20 percent mark that would allow him to avoid private mortgage insurance.

moving and other ancillary costs

A move, whether to a new rental or a 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 upkeep of the home – both initially and on an ongoing basis. These costs are not necessarily a drop in the ocean. The average cost of a local move is $1,250 and $4,890 for a long-distance move, according to Moving.com.

Additionally, “there are almost always expenses that you forget to include in your move, and the ones that you 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. If there is a gap or overlap between moves, buyers may have to double the mortgage or stay in a hotel until their new home is ready.

Your income and personal financial security

Prospective buyers should also consider how their financial situation might change in the short term, said Gregory W. Lawrence, board-certified financial planner and founder of the Lawrence Legacy Group in Estero, Fla. For example, what happens when a spouse wants to stay home to raise the children? Or what if one of you gets fired? Can you afford to live on one income? Do you also consider the source of your income? Is It Safe in a Recession? And how high are your future expenses likely to be?

“Don’t buy at peak times, get laid off and don’t have the money to pay for a house that you just invested a bunch of money in and that’s now under water because the market has gone down,” Lawrence said.

If you have a great buying opportunity but are concerned about your finances, it might make sense to put down a smaller deposit, even if it means private mortgage insurance, Lawrence said. “I wouldn’t bet 20% on a house unless I had enough assets to be sure I would never lose the house,” he said.

Wagner urges homebuyers to wait and see what he sees as a bubble about to burst. He warns people to remember the 2008 housing crisis and how many people suffered huge losses buying homes at the peak. “I’m afraid we’re in a similar situation where excessive speculation and liquidity and low interest rates have led to this housing boom,” he said.

“We know historically that nothing goes in one direction forever.

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