In recent months, the rise in interest rates has dampened down on the market.
According to Fannie Mae’s January 2023 Home Purchase Sentiment Index, just 17% of respondents believe it is a good moment to purchase a home.
The right time to purchase a home depends on a number of factors. These include your credit score, the size of downpayment, your debt-to income ratio, housing market conditions in localities, and any future plans.
Low inventory, rising home prices and higher mortgage rates are making buying a house more expensive across the country. Home sales and prices increased across the nation at the end 2022, a sign of a possible stabilization.
Western U.S. saw the largest decreases in sales, and the price of homes increased, whereas the Midwest, Northeast, and South experienced more modest declines. This is a reminder that home prices and inventory can differ significantly depending on where you reside.
You’ll learn about the current mortgage rate and price of homes, as well as factors you should consider before deciding if it is time to purchase.
Will mortgage interest rates go down?
Mortgage rates have been steadily increasing for nearly a full year. But they seem to be stabilizing, at least temporarily. The Federal Reserve raised the range of the federal funds rates in the first quarter 2022, which is the interest rate that banks charge one another to borrow short-term money.
Although the Fed does not set the mortgage rate, an increase in the federal funds rates increases borrowing costs for banks and organizations. The financial institutions could pass on the cost increase to customers through higher rates.
In 2022, the Fed increased the federal funds rates seven times to combat inflation. The average 30-year fixed-rate mortgage rate more than doubled. The rate peaked between October 27th and November 10, reaching 7.08% — the highest level in over 20 years.
Rates have been slowly declining since then but remain nearly twice as high as they were in the spring of 2022. It is difficult to know if rates will decrease.
Maintaining good credit, and shopping for mortgages around are two of the most effective ways to get the lowest rates. The rates vary between lenders, and those with better credit are more likely to qualify for a lower rate.
Do house prices begin to fall?
There are indications that in 2023, the housing market will begin to cool down after a period of rapid price increases between 2020 and 2022. As demand slowed and houses remained on the market for longer, there was only a 3.5% increase in median home values from November 2021 until November 2022.
According to Redfin, mortgage applications declined by 40% from the previous year for the week of December 4th 2022. The average home sold in 37 days, up from the 28-day period the previous year. This is 17 days more than the June 2022.
In spite of these trends, the inventory is still low. It’s unlikely home prices will fall as much in 2009 and 2008 during the Great Recession. It’s crucial to pay attention to the real estate market in your desired area if you are considering buying a home.
What is the ideal time to purchase a home?
You can determine when to purchase by examining your financial and lifestyle situation. Consider these factors.
Down Payment
There are programs that require no or low down payments, but you can still borrow more when you put more money down. This will make your monthly payment more manageable. You’ll have more equity in your home if you make a bigger down payment. If you use conventional loans and put down at least 20%, PMI (private mortgage insurance) is not required. Larger down payments can also lead to lower interest rates.
Credit
Credit scores are one of the main factors that lenders consider when determining your rate. Credit scores of 700 and higher are usually required for applicants to qualify for low rates. Improve your credit score to save hundreds of dollars per month.
Here’s an example. Your monthly payment for a 30-year, fixed-rate mortgage of $300,000.00 with an APR 7% would be $2,000.00 (excluding property taxes and homeowners insurance). If you are eligible for the 6% rate, then your monthly payment will be around $1,800.
Ratio of debt to income
Lenders prefer applicants with a ratio of debt to income that is 43% or lower. Paying off your higher debts may increase your chance of getting a mortgage.
Future Plans
If you don’t plan to live in the home, it may not be the best choice for you. Experts recommend living in your house for five years or more before you sell it. It usually takes five years to earn enough equity in a house to cover the closing costs, interest, and moving fees.
Budget
It’s crucial to determine what you are able to comfortably spend based not on the home value and interest rate today but rather what they were a few years ago. You may be able to afford less if you buy a home this year due to rising interest rates.
Include closing costs, home owner’s insurance and property taxes in your calculations.
You may want to consider buying if your finances are stable, and you plan on staying in the home you currently own for several more years. If your finances are in a shaky state or you’re planning to move within the next few years, then it might be best to hold off.
Use our calculator to find out how much home you can afford.
The Next Steps
A house purchase is a big decision that can affect your finances for many years. You can use these questions to decide whether you are ready to purchase a house this year.
- What is your down payment amount?
- What is the status of your credit rating?
- How long will you be staying in your house?
- What is the security of your current job?
- What is your monthly budget for mortgage payments?
- What is the inventory available to you?
- What’s the average price of a house in your region?