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It’s a trap you don’t want to fall into.
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If you’re looking to sign a mortgage today, you’re sort of in a good news/bad news situation. The good news is that mortgage rates are not as high as they were back in the fall of 2022, when they surpassed 7%. The bad news, though, is that mortgage rates are still above 6%, and they’re the highest they’ve been in over a decade. Given that home prices are also elevated, you might run into serious issues with affordability if you purchase a home today.
Now, you might tell yourself that even though buying a home today is a stretch, you can make it work. After all, mortgage rates are apt to come down eventually. And once they do, you can refinance your mortgage, lower its interest rate, and shrink those monthly payments.
It’s a good plan in theory. But it may not work out so well in practice.
You may be waiting a while to refinance
Generally speaking, refinancing really only makes sense when you can lower the interest rate on your mortgage by about 1% or more. The reason for this is that refinancing isn’t free. Rather, you pay closing costs to refinance a mortgage, and those can constitute a large outlay. So you’ll need to make sure you’re reaping enough interest-related savings to make those closing costs worth paying.
Meanwhile, mortgage rates have dropped considerably since peaking in late 2022. But if you’re looking at signing a mortgage today, you should know that rates might decline at a slower pace in the coming months than they did between late 2022 and now. And so you may not have a great opportunity to refinance your mortgage for quite some time.
That’s why taking on a mortgage you can’t easily afford isn’t a great bet. If you tell yourself you’ll dip into your savings for a while until you’re able to refinance your mortgage and lower your monthly payments, you might end up doing that for a long time, to the point where your cash reserves are totally depleted. And then you might be seriously out of luck if something breaks in your home or you lose your job and need those savings to fall back on.
Make sure you can truly afford your home
As a general rule, your housing costs, which include your mortgage payment, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. If, based on today’s mortgage rates, you can’t keep your monthly housing costs to 30% of your income or less, then you should really hold off on buying, or otherwise look to buy in an area where homes are less expensive.
You might think you can swing a higher mortgage payment for a few months and then refinance to give yourself relief. But if an opportunity to refinance doesn’t come around for a long time, then you could end up wrecking your finances irreparably, not to mention put yourself at risk of losing the home you stretched your home-buying budget to be able to buy.
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