When the Federal Reserve stopped buying Treasury bonds last fall, experts predicted interest rates would rise, sparking a sense of urgency among prospective homebuyers to take advantage of historically low rates before it was too late.
Now the rise in interest rates – also predicted in 2014, but not realized as the Fed eased off on bond buying – is looking less certain. Some experts believe rates will fall; others believe they will stay the same and even those who predict an increase say the increase will be small.
“There is no rush to buy for the interest rates because we don’t see rates moving very quickly or very much from this year to next,” says Nela Richardson, chief economist for Redfin in the District of Columbia, who expects mortgage rates to rise slightly this year. “The housing market is not one where anyone should feel an urgency to buy now.”
The average rate for a 30-year, fixed-rate mortgage fell to 3.66 percent this week, according to Freddie Mac’s weekly mortgage market survey. That’s the lowest rate since May 2013.
Interest rates, however, should not be the primary factor that determines when you purchase a home. For most buyers, other factors are much more important. Rather than buy now for fear that rates might suddenly increase, for example, it might be smart to wait so you can save up a bigger down payment.
“Small changes in interest rates don’t make large changes in your payment,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage broker in the San Francisco Bay Area. Fleming actually believes interest rates may drop further. “Interest rates are not the most important piece of [homebuying].”
If you’re ready to buy a home, 2015 could be a good year. The inventory of homes for sale is likely to rise and fewer flippers are scooping up the best homes with all-cash deals, Richardson says.
Low interest rates are contributing to the higher inventory, she says, because homeowners who are ready to sell their homes and move to a bigger or smaller home, or a new neighborhood, are willing to abandon their low-rate mortgages if they can secure an equally good loan. Plus, home appreciation has slowed, so there is less reason to stay put.
“The payoff to waiting [to sell] is not going to be a lot,” Richardson says. “Right now it’s the best it’s going to get,” she adds. “Maybe it’s time to rush and sell but not time to rush and buy.”
For most prospective homebuyers, other factors are likely to be more important than interest rates when they do the math about whether 2015 is the right year to buy.
“If you can afford a down payment now and you’re going to be in the home a long period of time, it’s a very attractive time to buy a home,” says Stan Humphries, chief economist for Zillow. But he cautions buyers against making their decision based on what they’ve heard about imminent interest rate increases. “There’s no need to rush out and beat an interest rate increase. You can walk, not run, to your bank the way interest rates are going.”
Interest rates fluctuate and may change countless times between the moment someone decides to buy a home and when they actually close the deal. “It’s very hard to time your purchase. Interest rates go up and down week to week and month to month,” says Jed Kolko, chief economist for Trulia. “Buying a home is a slower process.” He expects interest rates to rise slightly this year, but he notes that all the economists predicted higher rates last year, when rates ended up falling.
Here are six factors that may be more important than interest rates when deciding whether to buy a home this year.
Length of time you’ll stay in that home. How long you have to live in a home to make it more economical than renting varies by locality and, in fact, by the individual home a person is considering buying or renting. “On average, it takes four to seven years to break even on a home, where you’ve got enough appreciation where it can pay you back for the cost of the transaction and cost of ownership,” Fleming says. “If you’re thinking about buying a home, selling it in two years and think it’s going to be cheaper than renting, it’s very unlikely to be.”
Job security. You don’t want to buy a home and then discover you’ll need to relocate to get a new job in six months or, even worse, end up unemployed and unable to make payments. Lenders typically like to see two years of job history, though that isn’t always necessary if you have changed jobs within the same field.
Down payment. Fannie Mae and Freddie Mac have announced plans to back loans with down payments as low as 3 percent, while the Federal Housing Administration offers loans with down payments of as little as 3.5 percent. But if you put less than 20 percent down, you have to pay private mortgage insurance every month, which could cost you more than a slightly higher interest rate. “If they’re looking at an FHA mortgage, paying PMI is a lifetime proposition,” Humphries says. With a conventional mortgage, you can ask to have the PMI removed once you have 20 percent equity in your home. That’s not possible with an FHA mortgage.
Emotional readiness. Not everyone is ready to own a home. If your dream is to travel the world, you should do that first. Or, you might not be sure you want to stay in your current city. Plus, homeownership brings additional responsibilities. “Your life changes a great deal when you go from being a renter to an owner,” Fleming says. “When things break, it’s your responsibility to fix them, not the landlord’s.”
Financial readiness. Before you buy a home, you want to make sure you have good credit, a steady income and some money in the bank beyond what you’ll need for a down payment. You likely will have to pay a year’s worth of homeowners insurance and property taxes up front. All homes, even new homes, require maintenance. And you don’t want to be stuck with no reserves if the air conditioner or furnace dies shortly after you move in.
Your local housing market. In some cities, buying a home is significantly cheaper than renting. In others, the calculation is less clear. Macro math aside, you might also discover that you can’t afford a home in a neighborhood you want or the type of home you want is in short supply this year.