Mortgage rates are climbing, but it could still make sense to borrow now
The latest inflation report, released this week, shows that inflation came in higher than expected in March, indicating that the stubborn issues that have plagued the economy for the past couple of years are still far from resolved. This unwelcome news then caused mortgage rates to climb in tandem, pushing the average 30-year mortgage rate above the 7% mark.
Today's higher mortgage rates mean that the cost of buying a home just got more expensive. And, mortgage rates are climbing at a time when home prices are significantly elevated. So, if you're a potential homebuyer, sticker shock may be causing you to have second thoughts about making your move.
But even with today's higher cost of borrowing, it could still make financial sense for many people to take out a mortgage. Below, we'll detail a few reasons why it could still be worth acting now.
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Why it could still make sense to buy a home
If you're thinking about pausing your home purchase to wait out today's elevated mortgage rates, you may want to think twice about that plan. Here's why:
Mortgage rates could climb even higher
While 7% may seem like a high mortgage rate, it's important to keep in mind that rates could continue to rise further if inflation remains stubborn. Many experts were expecting rates to drop a few times this year starting in mid-2024, but the recent inflation reports have made it less likely to happen as expected. In fact, one Fed official said in a recent interview that rates may not drop at all in 2024.
And, the Federal Reserve has made it clear that it is willing to be aggressive in its fight against high prices. So while the benchmark rate is currently paused at a 23-year high, there's no guarantee that it will stay there. With inflation still high, there's always a chance of another rate increase in the months ahead unless something changes.
What that means is that if you wait to purchase a home, you could end up facing even higher mortgage rates down the line. But by locking in a mortgage rate in the 7% range today, you're effectively hedging against the risk of rates moving even higher.
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You have the option to refinance in the future
Buying a home now doesn't mean you're stuck with a high mortgage rate forever. If you take out a mortgage at today's higher rates, you still have the option to refinance to a lower rate in the future if and when rates start to come back down. This provides you with a potential hedge against rising rates and gives you the flexibility to potentially lower your monthly payments down the line.
Historically, mortgage rates have tended to fluctuate quite a bit, so it's certainly possible, and even likely, that we could see a return to lower rate environments in the years ahead, especially if the Fed gets inflation under control. And, by purchasing a home now, you'll be locking in a rate that is still relatively low by historical standards, even if it's higher than what we've become accustomed to in recent years.
You'll start to build home equity
Owning a home also provides the opportunity to build equity over time, which gives you a smart way to build wealth or borrow money in the future. Even if you end up paying a higher interest rate on your mortgage, the principal that you pay down each month will still contribute to an asset that you own rather than going to a landlord.
And, your home equity can be tapped into in the future with a home equity loan or home equity line of credit (HELOC), or it can be used to finance the purchase of a new home down the line. In a rising housing market, the value of your home is also likely to appreciate over time, further boosting the equity you build.
You'll get fixed monthly housing costs
By purchasing a home now, you can also lock in a fixed monthly mortgage payment that won't be subject to the whims of the rental market. After all, rents have risen in many parts of the country over the last few years, and there's no guarantee that this trend will reverse anytime soon.
But by buying a home, you can avoid the risk of your monthly housing costs continuing to climb due to rent hikes. If you opt for a fixed-rate mortgage loan, your mortgage payment will remain the same for the life of the loan, providing more stability and predictability in your monthly budget.
The bottom line
While the higher mortgage rates of today may be causing sticker shock for many prospective homebuyers, there are still reasons why it could still make sense to purchase a home now. By locking in a mortgage rate, building equity and avoiding the uncertainty of the rental market, you may be setting yourself up for long-term financial success, even if it means paying a bit more in interest over the short term.
