After my last post regarding buying a house, I received a comment from someone saying their sister is looking at buying a house. Specifically, the issue of interest rates was raised and there was a question of whether someone should hurry up and buy now.
As far as interest rates, nobody really knows for sure if they will go up or down in the near future. Regardless of one’s knowledge of Austrian economics, the future is unpredictable because of human action. Austrian economics can help us make forecasts based on certain conditions, but even then the timing is almost impossible. Of course, if any of us knew what interest rates would do next week or next month, we would be rich. If we could do it on a consistent basis, we would be richer than Warren Buffett.
While I think interest rates will go up over the longer term due to Federal Reserve inflation and the government running up debt, it really is impossible to say what they will do in the short-term. There were people 6 or 7 years ago saying that interest rates just couldn’t go any lower and yet they did. If the stock market crashes again and people get scared of another recession (or the recession not ending, depending on how you look at it), then rates could easily go down more.
The good thing is, I don’t think interest rates should really dictate to anyone whether they should hurry up and buy a house. For the person’s sister who will be looking, my advice is to look, but not hurry. Unless you live outside of a big city in the Midwest, then chances are that there are some good deals in your neighborhood. This really is a buyer’s market and you can afford to be patient and wait for a good deal. In some areas, there are a lot of short sales. While these can be really frustrating, they can also pay off. While some foreclosures are good deals too, you have to be careful not to get into any bidding wars with other people.
The good news is that if there is a jump in interest rates, it will probably just drive prices down commensurate with the rise in rates. If rates fall, then housing prices may tick up, but there should still be some deals out there.
You obviously can’t time the short-term moves in interest rates. This is just a game of luck. You can get a contract on a house and rates may go up or down the day before you were planning to lock in. But I wouldn’t make a big decision based on a quarter point of interest. And if for some reason you buy a house and rates fall after that, you always have the option of refinancing.
So for buying a house, my advice is that you should do it if it is right for you and you can afford it. Be patient and don’t feel rushed because of interest rates. When you do buy something, make sure you lock in a 30-year fixed rate mortgage so that you can pay back the bank in depreciated dollars later on.
Thanks!
In closing, you state, “When you do buy something, make sure you lock in a 30-year fixed rate mortgage so that you can pay back the bank in depreciated dollars later on.”
You made mention in a past post to Suze Orman and Dave Ramsey, and suggested that much of their advice is good. Ramsey recommends, after paying one’s other debts off (credit card, student loans, cars), that they boost their 401k/retirement investments to 15%/year, then to invest in college for the kids (if applicable), and *then* to pay the mortgage off early.
I’m turning 40 this year and just refinanced my mortgage to a new 5% fixed 30-year rate. The idea of still having a mortgage when I’m in my 60’s doesn’t appeal to me, so my goal was to pay extra on my mortgage each month once I paid off my other debts, with a goal of paying it off in 10-15 years instead of 30. But your closing comment bringing up the inflation risk got me to second-guessing that idea.
I guess the question is this: If I had no debt (other than my mortgage) and an extra $1000/month to spend, would it be better to put that $1000 towards the principal of my 5% fixed-rate mortgage, or to invest/use it in some other way?
Some banks really offer high interest rate for mortgage and home loans but it still depend if you have a bad credit score or not. A credit history may affect rates and terms of your mortgage loan.