Real estate agents and economists love to extol the virtues of home ownership when interest rates are low. In fact, they tend to see periods of low interest rates as the very best time to buy a home for just about everyone.
Do your best to ignore the low rate hype. Sure, it’s better to get a low-rate mortgage than a high-rate one, but mortgage rates should never be the primary reason you buy a house. It’s even possible that chasing low rates can cause you to lose money.
How in the world can that possibly happen? Here are a few scenarios where buying a house—regardless of the mortgage rate—will lose you money:
What’s Ahead:
Scenario 1: You buy before you’re ready to settle in for the long haul
It doesn’t matter how low mortgage rates are, or even how “hot” the housing market is — you should never buy a house if you’re not ready on a personal level. No matter what you read and hear, homeownership isn’t for everyone.
For example, if you’re single or in an uncertain career position (either good or bad), owning a house is probably not the best course of action for you. Homeownership is a long-term proposition; if your current situation looks to be decidedly short-term, there’s no point in locking in your housing arrangement now.
Should you purchase a home, even if you can easily afford to do so, and have to sell it in one or two years, it’s almost certain that you will lose money.
This is because of closing costs. When you purchase a home, you pay closing costs — mostly to the mortgage lender. But you pay fees again when you sell the home — this time mostly to pay a real estate commission, to subsidize the buyer’s closing costs, and other settlement fees.
If you pay 3 percent in closing costs to purchase a home, then another 10 percent to sell it, the house will need to have increased in value by at least 13 percent in order for you to not lose money on the exchange. If the property doesn’t rise in value at least that much, owning the house will cost you money — over and above your monthly payment and other expenses paid to maintain the property.
Scenario 2: You have significant non-mortgage debt
Mortgages are usually thought of as being “good debt.” While that’s often true, accumulating good debt doesn’t do anything to make your bad debt go away.
If you have a significant amount of bad debt — credit cards, store charge accounts, car loans, or other forms of debt — adding a mortgage to the list could prove to be an unsustainable burden.
Another type of debt almost synonymous with millennials is student loan debt. Though generally considered to be good debt, student loans are debt nonetheless , no matter how you classify them — and they add to your cost of living.
Before considering buying a home, carefully evaluate your existing debt situation. If you think that the current debt load is even a little bit uncomfortable, your best course of action would be to wait to buy a home until you get those other non-housing debts under better control.
You can use a mortgage-industry barometer to help you make this determination.
Mortgage lenders generally allow you to carry a debt load that does not exceed 36 percent of your stable monthly income. This is known as your “debt-to-income ratio,” or DTI. That includes the proposed house payment (principal, interest, taxes, and insurance, or PITI), plus payments on student loans, car loans, credit cards, and child support or alimony. (It does not include non-housing insurance expenses, or utility bills and the like).
If your current monthly debt payments plus the monthly payment on a new home will exceed 36 percent of your monthly income, you almost certainly need to wait before buying a home.
WARNING: Some mortgage lenders may pre-approve you for a mortgage even though your debt-to-income ratio exceeds 36 percent. But that doesn’t mean you can afford to carry the new house payment — it just says that the lender is willing to make you a loan. Proceed with caution!
Related: Debt-to-income ratio: The little number your bank cares about (and you should too)
Scenario 3: You really can’t afford the cost of owning a house
There’s more to owning a home than simply qualifying for the monthly mortgage payment. Even though the lender doesn’t include them in the calculation, you should get a rough idea of what utilities will cost. Though you may be able to afford a $1,500-per-month house payment, you may find that payment plus $500 per month in utility costs to be more than you can handle.
Consider your overall cost of living — do you have other expenses in your life that a mortgage lender may not include in qualifying you for a loan? For example, if you are currently providing financial assistance for an aging or ailing family member or friend, you may find yourself forced to choose between the new house payment and continuing that assistance.
Also, think about how you like to live. It’s not uncommon for buying a home to leave you “house poor.” That’s a condition in which, though you may live in a nice house, most of your income goes to maintaining it and there’s little left over for anything else. Do you have expensive hobbies and preferences? Think about travel, dining out, different forms of entertainment, and your general spending habits, and how they’ll be impacted by owning a home.
Related: How do you know when you are ready to buy a home
Scenario 4: You’re unprepared for unexpected problems
When you rent, you can call a landlord anytime something breaks. But when you’re the owner, you are the landlord and will need to pay to repair whatever’s broken.
This may not be a problem if it’s something simple, such as replacing a door handle or light fixture. But if the roof springs a leak, or the furnace melts down, you’ll be looking at an expense of several thousand dollars.
Much will also depend upon your own ability to perform repairs. If you’re particularly handy in this regard, it shouldn’t be much of a problem. If you’re not, you’ll have to pay others for repairs, and that gets expensive.
But that’s not insurmountable, either. As long as you have a few thousand dollars set aside as a cushion (known as “reserves” in the mortgage industry), you should be able to handle it. But if you’re not good with repairs, and you don’t have any reserves, it might be best to wait to buy a house, no matter how low interest rates are.
Conclusion: Don’t be afraid of high interest rates or worry you’ll miss out on low rates
No matter how attractive low mortgage rates may be, never panic-buy. And whatever you do, don’t get caught up in the “rising rates” trap. That’s where a real estate agent or builder tries to persuade you that now is the time to buy, because interest rates are going up in a few months.
No one really knows where interest rates are heading, but realtors and builders will use rates and the direction of rates as a way to motivate buyers. Don’t take that bait!
No matter where interest rates are, if you’re not ready to buy at a personal level, you’ve got no business buying. And here’s another bit of information you may find comforting: It can be better to buy a home when interest rates are high, rather than when they’re low.
Here’s why…
Generally speaking, when mortgage rates are low, home selling is brisk. Property values are often rising, sometimes at speculative levels. But rising rates have the opposite effect. Every time rates move up a notch, a whole bunch of borrowers are eliminated from the pool of potential homeowners. As the number of borrowers/buyers shrinks, the market cools. Sellers begin competing with one another for the shrinking buyer pool by offering discounts and incentives.
You may actually find house prices are lower in a higher rate environment. That can be a win-win too. You can lock in the lower price when you buy, then refinance when rates drop later on. And they will drop because the economy can’t sustain high interest rates for too long.
And when rates do finally begin to fall, it almost certainly will cause your property to rise in value. When that happens, you’ll have both a lower monthly payment and a rising equity position.
That alone is a strong reason why buying a house because of low rates is completely unnecessary. And when you throw in all of the other personal reasons, it should be obvious that you can and should buy on your own timetable.
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