The summer mail bag continues with this week’s focus on real estate.
Q: We are a 38-year-old couple and have been looking for a house for over a year and are discouraged. When we have gotten close, the deal either falls apart or we get outbid. Help!
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A: Home prices have skyrocketed since the pandemic. The median sales price for an existing home in February 2020 was $270,100, compared with the most recent data (through July), which showed an eye-popping $406,700.
You do not have to be a math genius to see that home price appreciation has far outpaced the overall inflation rate. For people like you, the process of finding a home is simply exhausting. If you can’t stand it anymore, why not take a time out on the search and see if new inventory hits the market after the end of the year.
Q: Is it crazy to buy a house now that mortgage rates are above 7 percent?
A: For would-be homebuyers, the headlines that proclaimed the highest mortgage rates in two decades were depressing. According to Freddie Mac, the average rate on a 30-year fixed rate loan was 7.23% as of August 24, the highest rate since 2001.
That said, there have been plenty of times in the past when homeowners made a purchase with loans that were even higher. The key to feeling more secure about a purchase when rates are high is to run the numbers. If you can manage the payments now, there will likely be some time in the future when you will be able to refinance to a lower rate.
Q: With 30-year mortgage rates high, should I consider an adjustable-rate loan?
A: An adjustable-rate mortgage (ARM) is a loan that has two distinct periods: composed of an initial period where there is a fixed rate of the loan during which the interest rate stays the same. The initial period can range from six months to 10 years.
The second period is the tricky part. That’s when the loan adjusts to prevailing interest rates, with a predetermined formula which outlines when and how often the interest rate can change. The strategy of using an ARM is that you are hoping to lock in a lower rate for the fixed period, during which you would either move or attempt to refinance to a traditional fixed rate loan.
The problem today is that ARM rates are not much of a bargain, compared with traditional 30-year fixed rate loans, which means that you may need to consider whether the risk of the adjustment period is worth it to you.
Q: Is it worth it to pay points to push down my mortgage rate?
A: “Points” refer to a percentage of the mortgage amount. So, if you are purchasing a $500,000 home with a $400,000 mortgage, one point equals 1% of the mortgage amount, or $4,000. Points are used to permanently lower the mortgage rate, usually by 0.25%, depending on the market and lender.
If you want to push down your monthly payment amount, paying points could be worth it. But when determining whether or not to do so, you should factor in how long you plan to be in the house, so that you can recoup the upfront investment.
Additionally, the IRS considers points as prepaid interest, which means that they may be deductible as home mortgage interest, as long as you itemize deductions. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. (The IRS has a handy tool to use: https://www.irs.gov/help/ita/can-i-deduct-my-mortgage-related-expenses)
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Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.