The Expert Podcast

So if you're watching this channel for a while, this news that interest rates on mortgages went over 8% shouldn't be a big surprise to you. It shouldn't be news really. We've been talking about this for more than a year that rates will go over eight and really probably settle in around 10%. That may seem like a lot when you saw rates at 2 or 3% for many years. 8% or 10% seems like astronomical, but it's really not. So what do you do about that if you're a renter, if you're a homeowner, or if you want to move? What do you do about it and what are the best next steps?

A year and a half ago, when rates were at 5% and they went up to 5.5%, you thought, “Well, I’ll wait for rates to go down.” You probably wish at the time you bought a house because now they’re at 8%, and home prices are even higher. So now, looking forward, you can’t go back in time. What do you do next? And why are rates 8%? If you look at the top of this article, it says, "In addition to rates being 8%, it says that the Federal Reserve chairman Powell says inflation is still too high and lower economic growth is likely needed to bring it down." That’s the breaking news at the top of this article, right? How does the Federal Reserve bring down inflation? They raise interest rates. Rates are going to continue to go up for housing. The only way to prevent higher interest rates from affecting you is to buy a house now to lock in rates.

You might say, “I don’t want to lock in 8%.” Well, when you get an interest rate on a mortgage, remember, you're only locking in from the upside. If you buy a house and get a mortgage at 8% today and rates go up, breathe a sigh of relief because you're not paying the higher rate. Your rate doesn’t go up on your mortgage once you buy a house. If the rates go down to 6% or 5%, which they probably won’t do, but if they do, you can benefit from that too because you can refinance. You can refinance lower, but you don’t have to refinance higher. So that’s how you can lock it in.

What about buying a house? Is it a good idea? Well, let's take a look at a couple of things. First of all, defensive homeownership has been blamed for everything from nimbyism to urban sprawl. So why do I still want to do it? Well, there’s a lot of reasons why you want to do it. First of all, the price you pay each month for your home does not go up. If you are a homeowner, if you're a renter, at the end of your lease, your landlord could decide, “I want to jack your rent up 500 bucks. I want to kick you out and rent it to somebody else. I want to sell the property.” So you’re not guaranteed from year to year. Every single year, you have to cross your fingers and hope that you get to stay in your house. With a purchased home that you own, even with a mortgage, the only way you can get kicked out is if you stop paying your mortgage. That’s it. Everything else, you own it.

What else is a reason to own a house? Well, according to some new research, renting can age you faster than smoking or obesity, mostly because of stress but also because of lifestyle. If you want to live longer, you should buy a home. Buying a home is a life or death event. Maybe an exaggeration, I get it. It may be hard to imagine being able to buy a house. You need money down, you need good credit, you need a job, you need to find a home to buy, but there’s ways to be able to do that, we’ll look at very, very shortly.

Dave Ramsey, love him or hate him, agree or disagree, his opinion is the same: Don't wait for mortgage rates to go down to buy a house because they’re probably not going to go down. But even if they do, you can benefit from that because if the rates go back down to 5 or 6%, they probably won’t, but you can refinance. If the rates go up to 10%, now you're stuck because now you have to buy at 10%. Everybody who waited when rates went from 3.5% to 5.5% said, “Oh, I’ll wait for them to go back down.” They’re probably kicking themselves now because your housing payment would be a lot higher.

How do you buy a house if you’re currently renting, have mediocre credit, don’t have a lot of money for a down payment, and can’t afford a lot? How do you do it? Well, let's take a look. The first thing you do is find a home. Find a house that’s somewhere around $200,000 to $250,000. Here’s just one example we found in Virginia—a nice enough house, 1,700 ft², three bedrooms, three baths. This one also happens to be on 28. I’m not going to go into the house; you've seen many homes we’ve shown before on our website, homes.com. There are houses between $200,000 and $250,000 all over the country that are decent houses. They may not be your dream house, they may not be HGTV feature houses, but at least it's a home that you can live in and be established in.

We recommend that you buy the cheapest house you can stand, even if it’s not exactly what you want. Not the greatest condition, not the best paint. The only reason that landlords with apartments to rent take advantage is because they make it look new. When you buy it, then put new paint, maybe new countertops, and that’s it. But now you're at the mercy of them just to have something flashy. Buy something that, even if it’s a little bit dingy, this one’s not too bad. If you look at the pictures, it’s not the end of the world, right?

So if you take this house for $275,000, and you might say, “Well, I don’t have a down payment.” Well, there are down payment programs that are 3% down. Well, 3% of $275,000 is roughly about $7,000. That’s about what you need to come up with for first payment security on an apartment, right? So you probably have the down payment money, or you can come up with it. Then, what you do is you get a mortgage. Well, how much would a mortgage cost on a $275,000 property? Well, if you put down really almost nothing and you finance $270,000, your mortgage payment is $2,000 at 8.6%. Let’s bump it down to 8%. Well, now you're under $2,000, so roughly for $2,000, you’re in a single-family home. Your rent’s not going to go up. Your money is going towards appreciation.

If you rent an apartment, obviously you know this: If the apartment complex is worth more money in 5 years, you don’t get any of that. If this house is worth more money in 5 years, that money belongs to you. And more importantly, your payment doesn’t go up. It’s $1,989 forever, which is actually not true. After 30 years, if you get a 30-year mortgage, your payment goes to zero. So whatever age you are now, add 30 years. If you’re 40 years old, when you’re 70, you’ll have no monthly payment, which is probably a good thing because when you're 70, you’ll be retired.

What if you got a 20-year mortgage? How much would it be? A 20-year mortgage is only $200-$300 more. So imagine that you buy this house for $275,000, you put down $5,000 for your down payment, you finance $270,000, you pay $2,200 a month. That’s probably what your rent would be anyways on an apartment. And in 20 years, your rent goes to zero because you have paid off your mortgage. If you really want to get crazy, what about a 15-year mortgage? You could pay $2,500 a month, which is probably what your rent would be, and in 15 years, your monthly payment for your house is zero. Imagine you're 26 years old, you get a 15-year mortgage, you pay $2,500 a month, and when you're 41, zero—no payment. How great would that be?

Now, yeah, you have things like insurance, you have to pay, and real estate taxes, but those are going to be minimal on a $250,000 house. In addition, you never have to worry about the landlord kicking you out or your rent going up. Do you have to fix your own sink? Yep. Do you have to maybe paint once in a while? Probably. Probably change the filter on your air conditioner? Yep. There are some things you have to do, but those are things that a lot of times don’t cost any actual money. You could do it with your own sweat equity, your own labor if you wanted to, and not have to worry about rent.

It sounds like a big deal when you say, “I don’t want to pay 8%.” Don’t let the 8% throw you because interest rates have been much higher in the past. And don’t throw you in terms of, “I don’t want this house.” You don’t have to buy that house. You can always move later.