As mortgage rates rise, how to decide whether to buy a home or rent


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It’s becoming harder to afford a home.

Prices are up almost 20% year over year, and mortgage rates are soaring.

The rate for a 30-year fixed loan is now 5.57%, according to Mortgage News Daily, up from 3.29% at the start of the year.

At the same time, consumer prices on everything from gas to food are also accelerating, costing Americans hundreds of dollars more in spending a month. In an effort to tamp down inflation, the Federal Reserve raised interest rates on Wednesday by half a point.

Mortgages rates don’t directly respond to Fed rate hikes on short-term rates, since the former is based on longer-term rates, such as the 10-year Treasury yield, explained Greg McBride, chief financial analyst at Bankrate.com.

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However, he foresees the possibility of some pain ahead for homebuyers.

“Until we see sustained evidence of inflation pressures moderating, the risk is very much toward higher mortgage rates,” McBride said.

“But when we do see inflation pressures ease, mortgage rates could reverse course quickly — especially if the economy is slowing, too.”

Meanwhile, rents are also rising.

“If you’re not sure whether or not you want to rent or buy right now … it’s better to make your decision based on your personal situation and your personal needs,” said Lexie Holbert, housing and lifestyle expert for Realtor.com.

Take these steps before making a decision whether to own a home or rent.

Do a financial checkup

Ask yourself if you are financially ready to own a home. That includes having enough emergency savings in case something happens in your first year of homeownership, Holbert said. You should also have enough monthly income to afford the mortgage payment, taxes and insurance, as well as extra monthly expenses like utilities.

Check your credit report, as well, since your credit score has a direct bearing on the mortgage you’ll get and interest rate you may pay. If you see any mistakes, have them corrected before you apply for a loan.

If you can’t afford the monthly payments, continue to rent and keep saving money if homeownership is your ultimate goal, Holbert said. If high rent prohibits you from saving, consider downsizing or making other big lifestyle changes so you can start putting more money aside.

“You’ll read that if you cut back on your $4 latte habit, it could really help you save for a home,” she said.

“While it’s really good to save, where you’re really going to find that big cash for that down payment is going to be in those big spending categories, like housing or your car.”

Assess your timing

Think about where you are in your life. Are you looking to settle down somewhere for a while or will you be moving in a couple of years?

The general rule of thumb is it takes about five years to seven years in a home to recoup the purchase costs, Holbert said. That includes closing costs, which add between 2% and 5% to the purchase price.

“If your home needs are going to be pretty consistent and pretty stable over the next few years, now may be a really good time to buy for you,” she said.

“If they’re changing, you may want to consider renting so that you have the flexibility to move.”

Set a budget

Figuring out what you can afford if you were to purchase a home is especially important now as home prices are rising, said Bankrate’s McBride.

This way, you have boundaries set around your home shopping.

“The position you won’t want to be in is falling in love with a home and getting your offer accepted and then having to figure out how to pay for it,” he said.

Check out homes in your price range on sites like Realtor.com or Zillow to determine if they fit your needs.



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