Zain Jaffer is a real estate and property tech investor who sold his mobile ad startup Vungle in 2019 to private equity firm Blackstone.
Given the recent May 2024 announcement by Fed Chairman Jerome Powell that the two percent inflation goal has not yet been met, it appears that there is no interest rate cut to be expected in the next few months.
The current Fed rate is in the five percent range. Powell however did not indicate a desire to hike rates further. He realizes that high interest rates are making debt expensive and life harder for people and businesses. However cutting rates prematurely risks driving inflation back up.
This May 2024, many mortgages being offered in America are in the seven percent range, two percent above the Fed rate since banks also need to make money. If the Fed cuts rates, this could go down. If the Fed hikes rates, this could go up.
So the question is, should you sign up for a seven percent mortgage rate? If that is a fixed rate mortgage, that will be your rate for several years. If adjustable, you benefit if the rate goes down, and unfortunately lose if the future rate goes up.
It depends on several factors. Ultimately it is a decision you alone need to make.
One, do you want the property (e.g. house) enough long term to spend a significant amount of your income on it? In other words, have you found your dream place where you want to settle down?
Remember once you take possession of the house, it is not only the mortgage that you will be paying off, but also spending on fire and flood insurance, real estate taxes, maintenance and repairs, and other costs.
If your plan is just to stay briefly in an area and you do not feel especially attached to a neighborhood or location, then perhaps renting is a better option. Also if you find that you have expensive hobbies you cannot part with or keep money in your high yielding investments and want to deduct your rentals as an expense if you are a corporation, then renting might be a good idea too.
Two, can you afford a seven percent mortgage? If you are single and find that you are simply buying non essential and useless things left and right, then buying a home is one of the best ways to build equity and force you to save money.
On the other hand, if you are burdened with car loans, student loans, credit card bills, food and utility bills, and have a good place that you can rent, then perhaps saving for a bigger equity downpayment is a better option so that your loan period is shorter. This also depends of course if rent payments or home mortgage payments are more expensive in your area.
In both cases, to ensure you do not default, you will want to maintain a healthy debt to income ratio, where you do not make the assumption that in order to make the payments, you will need to go on a water and crackers diet for the next ten years. Obviously that will not work.
There are no guarantees though that mortgage rates will go down to the three percent level that many people currently enjoy. Those days are probably over.
Three, aside from the house, you will also be building family memories, making lifelong friends, find opportunities, and other financial and non-financial returns. A house that you buy also becomes your castle. For your spouse and kids that could be a significant mental thing to think about too. It is something you can call your own. You gain certain property rights that also means no one can simply boot you out. Plus you are building your equity and net worth.
Deciding if you will sign up for a seven percent mortgage is not a spur of the moment decision. It will have significant implications for the way you live now, and your future. Take your time, but at some point you will need to draw a line in the sand and decide if this is it, or if you will pass.