Should You Marry the House and Date the Rate?
Now that rates are heading up into the sevens, you may have heard the slogan "Marry the house, date the rate". Meaning, buy the house now at today's rates and refinance when rates come back down. After all, houses are forever but you're not stuck with the same financing for the entire time you own your house. Sounds great, right!
I like the idea of refinancing to bring down your monthly payment if and when it makes sense for you. It's a great way to put a little more money in your pocket each month for essentials (Starbucks) or even cash out some of your equity and do some home improvements or even go to Paris! However, I personally do not like the idea that someone is counting on being able to refinance to a lower rate in order to realistically afford their home. It didn't work out in the last economic downturn and it may or may not work out this time around.
Leading up to the housing crash of 2008, many people signed on to adjustable rate mortgages (the rate starts out low and goes up after a few years). They did this with the promise that when the rate went up and they could no longer afford the payment, then they'd just refinance and everything would be great. Well, rates went up and home values plummeted. People could not refinance because the amount they owed on their adjustable (now high) rate mortgage exceeded what their house was now worth. If they couldn't keep up with their higher payments, they lost their homes. It was devastating.
I don't think this time around is at all like that. People have a ton of equity in their homes and are very well qualified for their loans. There is still historically low housing inventory throughout the country and there is no sign of a housing "crash" any time soon. However, I think that to buy a house with the expectation that your payment will go down in a couple of years just isn't a safe bet. We just don't know what will happen in the next few years and you don't want to get stuck being house poor.
So, what should you do? Well, first of all, there is going to be an adjustment period while people get used to 6% and 7% rates. In the grand scheme of the history of rates, this is a relatively low number. But if you want a truly lower rate today, talk to your lender! Working on your credit, putting more money down, and even buying down your rate can all help lower the interest rate. Many sellers today are even offering an amount towards an interest rate buy down for the buyer! Say you are writing an offer on your dream house. You might be tempted to offer, say, $10,000 less than the asking price. Keep in mind that this may lower your monthly payment $50 or $60. That's still great! Instead, ask for a credit towards your closing costs (ask your lender how much you can get - there's a limit!) that can be used to buy down your rate, which will save you more in the long run!