Rent or buy? How the Fed's mortgage rate changes can help you decide
Deciding to rent or buy is no easy task. There are pros and cons to both. But with interest rates at all-time lows thanks to the Fed’s mortgage rate changes, making the decision might be a little easier if you’re still on the fence. (iStock)
Choosing to rent or buy can be tricky. Homebuyers want a yard for the dog, but don’t want the upkeep. They’d like a guest room for in-laws, but home improvements are costly and time-consuming. Owning a home isn’t for everyone — but neither is renting.
The initial uncertainty brought on by COVID-19 made it more difficult for a potential home buyer to get a home loan. But mortgage financing is now more affordable and the housing market remains "strong." With interest rates at all-time lows, if you have a home loan, you can lower your monthly payments and save on interest with a loan refinance.
Explore all your loan refinance options by visiting Credible to compare refinance rates and mortgage lenders.
If you're not yet a homeowner, it's vital to compare the cost of buying vs. the cost of renting. You'll want to know the pros and cons of each — and, most importantly, which will save you more money in the long run. Here's what you need to know.
Rent vs. buy
Deciding whether to buy or rent usually comes down to total costs. Because of the coronavirus pandemic, the Fed has made financial decisions a little easier. In March 2020, the Fed cut the federal funds rate by a total of 1.5 percentage points, to between 0.25% and 0%. The federal fund rate is a benchmark for rates on both short-term and long-term loans, essentially lowering borrowing costs.
Interest rates are low, and homes often sell for more than list price. Whether to rent or buy is a conundrum many people find themselves in, which is usually resolved by looking at their finances. Here are simple benchmarks:
When to buy: If you have enough money to make a 20% down payment so you don’t pay mortgage insurance, then buying might be the best option.
When to rent: On the other hand, homeownership can be expensive when you consider property taxes and upkeep, so renting might be a better choice.
If you're considering buying a home, use an online mortgage broker like Credible to get a better understanding of closing costs, monthly payments, total costs and more. With Credible, you can compare rates and offers instantly (without any impact on your credit score) — plus, it's 100% free. Find your rate today.
WHAT CREDIT SCORE DO YOU NEED TO BUY A HOUSE?
How Fed rate decisions can help you pick
Mortgage rates rise and fall for many reasons–inflation, supply and demand, the general outlook of the economy, and by the Federal Reserve moving the federal funds rate. The Federal Reserve does not set mortgage rates, but it does indirectly influence the rates on home loans and refinancing.
The federal funds rate is set at the discretion of the Federal Reserve’s Federal Open Market Committee (FOMC). When the FOMC changes the federal funds rate, the rates on credit cards, savings accounts, and loans change, too.
A lower federal funds rate will lower rates on adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs). Fixed-rate mortgages are impacted more by the 10-year Treasury rate than by the federal funds rate.
Based on the current mortgage and refinance rates, it may be a good time for you to refinance. To see how much you could save on your monthly mortgage payment today, crunch the numbers and compare loan rates and mortgage lenders using Credible's free online tool.
HOW TO GET PRE-APPROVED FOR A MORTGAGE
What happens when the Fed cuts rates?
When the Fed cuts or raises the federal funds rate, it considers wages, employment, consumer spending, global markets, and more. The Fed cuts rates to stimulate the economy, making money becomes more accessible to both consumers and banks. To slow down the economy and control inflation, the Fed raises rates, which tightens access to money.
The coronavirus pandemic severely disrupted the Treasury market. As a result, the cost of borrowing money skyrocketed. So in March, the Fed announced steep cuts to short-term interest rates and a commitment to buy billions of dollars in long-term debt to lower long-term rates on loans. In the weeks following that decision, mortgage rates dipped to record lows.
HOW YOU CAN BENEFIT FROM THE FED'S EMERGENCY RATE CUTS
Today's mortgage rates
Here are the latest mortgage rates, per Freddie Mac:
30-year fixed-rate mortgage: 2.81%
15-year fixed-rate mortgage: 2.35%
That’s quite a difference from one year ago when the 30-year mortgage rate was 3.69%, and the 15-year mortgage rate was 3.15%.
It’s crucial to work to qualify for the lowest mortgage rates possible. With Credible, you can find out your rate and estimated monthly payments within minutes.
HOW TO LAND THE BEST MORTGAGE AND REFINANCE RATES
What do rising rates mean for home prices?
One thing is certain: no one can predict what interest rates will do in the coming months. The future of the housing market is also hard to predict. Although spring was slow, the home market heated up over this past summer, even amid COVID fears. That demand drove house prices higher. This was likely due to buyers competing for a limited supply of properties. Higher demand ultimately means higher prices. Mortgage refinance activity also surged.
Lower interest rates added to the frenzy as it lowered monthly payments. This allowed buyers to stretch their budgets and allowed sellers to ask for more for their homes. If interest rates jump, buyers will likely feel the added urgency to buy or refinance their mortgage to lock-in at a reasonable interest rate. This may fuel the competition for properties and inflate home prices even further.
If you’re a homeowner, compare mortgage rates with Credible to see if you can save, but don’t forget about closing costs, which could neutralize any savings you gain from a lower monthly payment.
What else should I consider when taking on a mortgage?
There are a couple of things to consider when taking on a mortgage. Buying a home is a big responsibility and a major investment. To qualify for the best rates on your new mortgage or refinance, your credit must be good to excellent. Check your score at one of the big three credit bureaus. It’s usually free. You can get a mortgage with poor credit, but you’ll likely pay higher rates.
You’ll also want to consider your budget, and how much you can honestly spend each month. Figure in: property taxes, closing costs, mortgage principal and interest, mortgage insurance, utilities, and other ongoing costs into the equation.
You can determine your total monthly costs by using an online mortgage calculator. Just fill in the price of the home, your down payment, the term, and interest rate. You should also visit an online mortgage broker like Credible to get personalized rates and preapproval letters without affecting your credit score.