Is now a good time to buy a home?
(And why is the market roaring during a pandemic?)
The market is hot right? Prices are inflated, so why would one want to purchase right now? The answer lies in what's called the "Over night rate" for banks. What is that you may ask, well Investopedia defines it as: "The overnight rate is the interest rate at which a depository institution (generally banks) lends or borrows funds with another depository institution in the overnight market. In many countries, the overnight rate is the interest rate the central bank sets to target monetary policy." What does that mean to you? The overnight rate dictates the rate at which lenders, including mortgage lenders, benchmark their rates to customers. The cheaper it is for banks to get money, the cheaper it is for consumers to borrow money. And for all the havoc and loss the pandemic has burdened the world with, it has made money cheap to borrow. So let's say today's rate for a 30-year fixed mortgage is 3.25% Then let's say that the rate went up by a percentage point. Let's use 300k as a hypothetical purchase price of a home in the US which is pretty close to median right now. So, 300k over 30 years is $148,000 in interest paid. Then let us bump the interest rate by 1%. Now your interest alone goes upto $198,000. That is an extra 40k over 30 years. Also take into account that your property (most of the time) appreciates in value. 2008 was a fluke and since then getting a mortgage approval has become considerably harder (like actually having to prove income). So in conclusion, yes you may pay more upfront, but over the course of a 30-year mortgage the up-front cost is more than justified. The interest rate is historically low because of the pandemic and hence the market is going wild because everyone wants to be locked-in at this rate while the going is hot. Purchase a home with a low interest rate, build equity while you live in it, and sit pretty while the property appreciates in value. As long as you don't plan to sell too quickly incase the market does take a dip, property will appreciate according to history. Roman Elizen (Please know that none of this is meant as financial advice, please consult a professional financial advisor before making any decisions pertaining to investments)