This is one of my favorite quotes from my all-time favorite president:
“Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.” ~Ronald Reagan
Ain’t it the truth?!
As the Federal Reserve tries to limit inflation by raising interest rates for banks, homebuyers are feeling the pinch of higher and higher mortgage rates. Every time mortgage rates increase, buyers need more money to buy the same home with the same purchase price and the same down payment.
In Ukiah, the average home price is $485,000. After a 20-percent down payment, your loan amount would be $388,000. With a 30-year, fixed-rate conventional loan at 7 percent (just an example), your monthly payment would be $2580. If that rate jumped to 7.75 percent, your monthly payment would go up by $200 to $2780.
That means, for you to continue to qualify for your home loan, your monthly income would have to go up by $600 per month (gross). If you are paid by the hour, we’re talking about a $3.60-per-hour raise to offset the Fed’s most recent rate hike. To be fair, when the market anticipates a rate increase, it often responds before the Fed makes their announcement; also, mortgage rates don’t always go up by the same amount as the rate banks pay. Still, when the Fed raises rates, mortgage rates usually aren’t far behind.
The important part of this discussion is to recognize that the housing market is in flux. Sellers need to understand this as much as buyers. If you’re talking to a Realtor about listing your home for sale in the near future, it will be a very different discussion than the one you might have had last spring. Buyers cannot afford the same payment as they could a few months ago. It’s not that they think your house is worth less, but when all is said and done, buyers can only afford a certain monthly payment.
Some buyers might consider purchasing a home that’s priced slightly above of their comfort zone in hopes of refinancing when rates drop, but that doesn’t always work. First, they must qualify for a loan at today’s rates. Second, there’s no guarantee rates will come down.
If you are a seller looking for a quick sale and you have the means, you can mitigate the increase in conventional loan rates by carrying the financing. This would not only reduce the buyer’s monthly payments, it would also help them avoid loan fees and appraisal fees, making your home more attractive.
If your property qualifies for conventional financing and rates do fall in near term, the buyer can refinance and pay you off. It’s a win for everyone.
If you’re in the market to buy a home, please choose one you can afford. Home ownership is wonderful. I highly recommend it. But it does come with costs—and not just mortgage payments. If you cannot keep up with repairs and maintenance, things can get miserable in a hurry. No house is worth stressing your budget so much that it causes emotional distress. Keep in mind, financial problems and disagreements are often cited during divorce proceedings, so do yourself a favor and choose a house that allows you to be comfortable with the payment. Small, cozy, and financially solvent is way better than large, luxurious, and falling apart.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.