Extra high interest rate- buy or not?

Question

Hey all. The only loan I qualify for is a first time home buyer loan based on income statements (of my business). The interest rate is going to be really high, about 8-9.8%. I talked to my broker about refinancing in 2024, but based on what I’ve read, it’s not predicted to lower THAT much.

Would this stop you from buying? This will be my first ever purchase, and my goal is for this to ultimately be an investment property.

Thanks!!

Would this stop you from buying? This will be my first ever purchase, and my goal is for this to ultimately be an investment property.

Thanks!!

Julien Jeannot · Answer

@Amanda Black

Not stoping me from buying. I'm selling two condo and looking to buy 2 multi.

When rates lower in a short supply market, I'm expecting prices to rise which means bigger downpayment and higher mortgage.

Start with the house hack strategy, grab a duplex if you can.

Benjamin Sulka · Answer

Amanda,

Try to house hack if that is something you're comfortable with. Go for a 2-4 unit.

You'll have to live in the property for a year but this will give you hands on investing experience.

Something to consider.

All the best!

Randall Alan · Answer

@Amanda Black

I think there are generally two schools of thought on this... those that believe in appreciation, versus those that believe in cash flow.  I would start off by saying that I am a cash-flow person.

If you start off looking at this as an investment property, you have to be able to 'hold' the property over time (in short, make your payments and repairs every month).  If your property doesn't have a positive cash flow, you are paying out of your pocket every month to hold that property... be it part of your mortgage payment, or to repair the hot water heater or AC or what have you.  This is where your personal resources come into play in the equation.  If you have the resources to where you can say, "It isn't cash flowing now, but it will when rates drop back into the 5's"... and (most importantly) "I have the extra income to invest in a future gain"... then you can think about an appreciation play where you will be upside down in the (relative) short term, and buy the property when there is less competition (now) and possibly get a lower offer accepted.

If you are not in a position to 'feed' the house money to be able to hold it because a super-high interest rate results in negative cash flow, then your answer is to wait for prices or interest rates to come down until you can achieve a positive cash flow on your purchase.

Since it sounds like this will be a personal house in the short term, the math is a little more simple up front... "Can I afford to make the payment on this house every month to be able to live here and still afford the rest of my life?"  Rates will definitely drop in the coming few years.  Just like they went up, mostly by quarter points, you will likely see them come down starting in mid 2024 (per the prognosticators out there).  So across the Fed's 8 meetings in a year you could likely see rates drop by 2 points if they cut rates by .25/meeting.

One broader point is to consider the cost of a future refi.  You are likely looking at $3,000 to $5,000 to refinance.  If you are only making $100 a month progress on paying down your loan - it will take you 2-3 years to recover the cost of refinancing the property based on loan pay down.  So your short term argument would be on the property appreciating more than it would cost you to refi.  If your property appreciates 3-5%/ year and let's say it's a $200,000 house - that is $6,000 to $10,000 in appreciation you gain in a year.  But you don't realize that appreciation until you either sell the property, or cash-out refinance it.

The other perspective we don't know is, "What are you spending on housing now, versus what the payment would be on the new purchase?  If you are saving money each month buying the new house, that is a no brainer... buy the house.  But if you are going to be out extra money versus what you are currently spending, ask yourself how is that going to affect your lifestyle.  If you will be spending an extra $600 a month on housing, and that $600 is a significant portion of your remaining disposable income, I think that would be a good argument to hold off on a high interest rate loan and just wait for rates to drop some.  You don't want to be house poor.. where you have a nice house, but can't afford to live life.

At the end of the day it's about evaluating your options around your situation.  We don't know your entire situation, but hopefully the above helps point out some possibilities.

All the best!

Randy

Stephanie Walker · Answer

I would focus less on the interest rate % and more on whether or not the monthly payments are doable for you. In order to refinance (aside from the rate) to a conventional or FHA product, what do you need to do? Do you need another year of tax returns? Another two years of returns?

Rates by itself would never deter me from a purchase, whether it's an investment property or personal purchase. It would simply be whether or not the monthly payment is doable and realistic and if the house fits my needs.

Mario Gomez · Answer

It wouldn’t stop me from buying if the numbers on the deal make sense

Carlos Ptriawan · Answer

What I don't understand is why for FTHB he got 9%, that's more DSCR flipper rate. Are you buying rental or for your own primary ?Again today rate conventional is on the six already.

Russell Brazil · Answer

The longer you own real estate, the wealthier you get. Do you think people who bought the last time rates were 9% felt it was a mistake? Doubtful

Michael Dumler · Answer

@Amanda Black, there is a simple solution to this, it's called house hacking. If this is an investment strategy that you're comfortable with, start exploring deals now so you no longer have to pay for someone else's mortgage.

Dan H. · Answer

They may have questioned if it was a mistake, but if they still own the property, they recognize it was a smart decision/investment.

Extra high interest rate- buy or not?

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