You’ve heard of a forever home. But you probably haven’t given much thought to a “forever rate.”
If you’re buying a house in the current market, flipping your focus from forever home to forever rate can bring some much-needed perspective to your home search.
- Rates are still lower than they have been for most of the past 30 years
- You can still get a “forever rate” – one you may want to keep as long as you’re paying on your loan
- Even if you don’t plan to stay in the home forever, buying at a good rate now has many advantages
- The housing market is unlikely to crash. Today’s market is very different from 2008
What's in this Article?
What is a “forever rate”?
If you go by the headlines these days, it’s easy to get spooked out of the housing market. Home prices are soaring, interest rates are rising, and there are too few houses for too many buyers.
But let me offer some perspective about buying a house in the current market.
Historically, rates are still remarkably low. In March 1992, 30-year fixed-rate mortgage rates averaged 8.98%, according to Freddie Mac. In March 2002, they were above 7%. Generally speaking, rates have declined for the past three decades, though the lows seen during 2020 and 2021 were unprecedented (but then, so was the coronavirus pandemic).
Now, rates are climbing, which is to be expected. They couldn’t continue falling forever, and there’s a natural increase as the Federal Reserve attempts to slow inflation.
But rates are still quite low by historical standards, which is why I like to talk about finding your “forever rate.” When I refer to forever rates, I mean a rate that is low enough that you’d want to lock it in with a fixed-rate mortgage.
No one can say with certainty what will happen with rates in the coming years. But the chances of getting an interest rate of, say, 3.5% again in the near future are pretty low.
Even if rates climb well above that, it’s still quite good, historically speaking. That’s the kind of rate you might want to have for the entire life of your loan.
Let me say that “forever rate” does not mean “perfect rate.” There’s no such thing as a perfect rate. And the rate you receive will depend somewhat on the average rate in the market, but it also depends a lot on your finances: your credit score, down payment, and debt-to-income ratio (DTI)*.
Interest rates are highly individual, so the goal isn’t to get an arbitrary “ideal” rate. It’s to qualify for a rate that’s competitive and affordable and that gives you a monthly mortgage payment that’s comfortable for your budget.
Buying a house in today’s market — rather than waiting — can help you lock in a competitive rate.
*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
The reason I like to talk about forever rates vs forever homes is this: Buying a house in the current market may mean compromising on the property you buy.
Perhaps it’s a bit smaller or older than you might have liked. Maybe it’s in a good area, but not your top choice place to live. Those compromises can be a tough pill to swallow.
Locking in a good interest rate can make it a little easier. A fixed-rate mortgage allows you to stabilize your housing payment, as you’ll know what your monthly payment will be for as long as you have the loan (assuming that you don’t refinance).
Buying a less-than-perfect house with a competitive interest rate also creates new possibilities long-term:
- With an affordable mortgage payment, you can save up to renovate the house and make it that perfect forever home
- Or, you can buy the house with a renovation loan, which allows you to finance the purchase and renovation expenses with a single, low down payment mortgage
Maybe you’re planning to buy a starter home now, knowing you’ll want to move in a few years. Perhaps you’re doing a medical residency, and you expect to relocate for a new job opportunity.
In other words, you’re not so concerned about finding a forever home – but you still want a good rate.
Now is still a good time to buy, even under those circumstances. Let’s say you buy a house now at a comparatively good rate, with the intention to move a few years down the road. The rate you get on this property is what I’d call a “transitory” rate, because you’ll transition to another property and loan at some point.
But by buying a house in the current market with a good mortgage rate now, you’ve:
- Bought a property in which you’ll gain equity while you live in it, and you can use that equity to purchase another home once you’re ready
- Stabilized your housing payment for the time you’re living in the home, avoiding higher interest rates or rent hikes
- Created potential to turn the home into a rental once you move out, and the rate will be lower than what you’d get on an investment property loan
There’s no doubt that housing prices have risen in the past two years. And in some areas, particularly around major cities, prices have hit all-time highs. These are the stories that dominate headlines because outliers are exciting and most likely to grab attention.
But buying a house can still be affordable in the current market, especially in certain areas of the country. The Midwest and the Southeast and Southwest in particular still have many areas where housing prices are moderate, and you can find a spacious home with a yard and a comfortable cost of living.
The 10 most affordable metro areas in the U.S. are all found in these regions, and the median price of a newly built home in each of these metros is substantially less than the national median of $423,300. And that’s only newly built homes. That doesn’t include existing homes, which often have great bones and plenty to offer as well.
Again, it’s important to keep perspective. Yes, there are metros in the U.S. where affordability has plummeted and many homebuyers have been boxed out of the market. But there are still small but vibrant cities, suburbs, and rural areas where homes are still within reach.
In a word, no.
A lot of people fear another housing bubble because they remember the crash of 2008, and the wave of foreclosures as housing values dropped and homeowners became underwater on their mortgages (meaning they owed more than the house was worth).
Today’s market is different in three key ways:
- Lending regulations have become much stricter, which means many of the high-risk and predatory lending practices that led to the housing crash are no longer in use. Lenders must verify that homebuyers can afford their mortgages, and new protections are in place to ensure that consumers are not being given loans that are not in their best interests
- Homeowners have more equity in their homes, so they’re less likely to undergo foreclosure. Home values have risen across the country in recent years, so fewer owners are likely to owe more than their homes are worth. That means that if they are struggling to pay their mortgages, they’re likely able to sell the home for enough to pay off the loan and have money left over to purchase a smaller property or rent somewhere more affordable
- Lenders learned from 2008. New regulations and strategies have been implemented so that mortgage lenders and servicers (the companies that sometimes manage mortgage payments after a loan has closed) can help struggling homeowners avoid foreclosures
Housing prices are still rising this year, and there will eventually be a correction and price growth will slow down. But it’s not likely that this will be due to a crash.
As interest rates increase, fewer people will be rushing to buy houses, as higher interest rates means you can afford less home and you will pay more for the loan over time. When demand eases up, the growth in home prices will slow as well. But experts do not expect home values to tumble as they did in 2008.
We’ve been in a sellers’ market since 2020, because the drop in interest rates motivated a lot of people to buy homes, particularly as they transitioned to remote work during the coronavirus pandemic.
Demand for houses has far outpaced the supply of available properties, especially because some homeowners who might otherwise have sold their homes decided to refinance instead when rates were exceptionally low.
That doesn’t mean buyers can’t win in this market. You can still find a home with a good interest rate and lock it in with a fixed-rate mortgage.
Finding a house right now is tough in places where demand is soaring. But there are still ways to find a great property, including:
- Look in quieter or up-and-coming areas that have some amenities and signs of growth but are not in or near a major city
- Consider an older home or fixer-upper, and finance the purchase and renovations with a renovation loan
- Look for a house that will suit your needs for the next five to 10 years instead of focusing solely on finding a forever home
Housing prices are expected to continue rising through 2022, along with interest rates. Homebuyers who plan to buy this year, and who are financially ready to buy, would be well served to get preapproved with a mortgage lender sooner rather than later.
Preapproval will tell them how much house they can afford, and it will enable them to begin scheduling home tours with real estate agents.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.