With the Fed rising, should you put your plans to buy a house or a car on hold?

As if it weren’t hard enough to make a major purchase at a time when the cost of living is skyrocketing, the interest rates to finance those expensive purchases are rising.

Today, consumers face a difficult question: should they halt their search for new homes, cars and other big-ticket items in the hope that interest rates will fall when inflation is brought under control?

It’s a question that gains urgency with every meeting of the Federal Reserve on a key interest rate. The central bank is expected to announce its latest rate decision on Wednesday afternoon.

Consider the rates that people look down on.

For a home, a potential buyer would face a rate of 5.54% on a 30-year fixed mortgage, Freddie Mac FMCC,
-2.26%
said last week. That’s up from 2.76% a year ago.

For a new car, five-year auto loans soared to 4.86% at the end of July, from 4.47% in April, according to Bankrate.com.

Even for everyday goods and services that a person puts on their credit card, rates go up.

During the second quarter, the annual percentage rates reached 15.13%, compared to 14.56% in the first quarter, according to LendingTree. This month, the average rate on all new credit cards is 20.82%, up from 20.17% a month ago.

The Fed is expected to allow another hike in the federal funds rate this week, which influences the interest rates lenders charge people who buy homes, cars or use a credit card. The Fed has already raised the federal funds rate three times since March.

That could raise the rate another 75 basis points this week, some forecasters said. Rate cuts could begin early next year, some Fed watchers say, but it’s a guessing game.

The Fed’s rate hikes are meant to throw cold water on hot inflation rates, on the theory that higher borrowing costs are dampening consumer demand. As the Fed pushes ahead with its plans, some people decide to go ahead with their big spending plans.

It’s a question that financial planner Cecil Staton has been hearing more and more from clients since the start of this year. “They’re scared or worried if they make the right decision,” said Staton, founder of Arch Financial Planning in Athens, Georgia.

After questions about the market turmoil, Staton says the biggest question customers have is whether to move forward or wait for rate-sensitive transactions such as home purchases.

The question of how to proceed in a rising rate environment is “certainly a bigger question in people’s minds that they have to weigh as a potential cost,” said Caleb Pepperday, wealth adviser at JFS Wealth Advisors, headquartered in Hermitage, Penn.

There are signs that higher costs, including interest rates, are keeping some potential buyers away.

Existing home sales in June beat expectations and marked the fifth consecutive month of decline. Home price growth in major cities hit record highs in May.

Estimated second-quarter new car sales, while up 5.1% from the prior quarter, are down nearly 21% from a year earlier, according to Edmunds.com.

Meanwhile, three in 10 people planned to buy a new car this year, but 60% of potential buyers were reconsidering or stopping altogether, according to a Quicken survey this month. Two in 10 people were considering buying a home this year, but about 70% canceled it. Rising interest rates have been one of the factors playing into people’s decisions to move, the survey notes.

A major spending decision is an important choice in any environment – ​​let alone at a time when inflation is at a 41-year high and there is still talk of a potential recession. Here’s what to consider if you’re pausing the search for a new car or house, or speeding up the search to beat even higher rates.

What to do if you put a large purchase on hold due to rising interest rates

Consider where to keep the down payment money. Anyone looking to wrap up their big spending plans over the next one to three years should be extremely careful about where they set aside cash for down payments and related expenses, said Zachary Gildehaus, senior analyst at Edward Jones in St. Louis, Mo. They also need to keep it highly liquid, he noted.

Think high-yield savings accounts or money market funds, he said. If the deferred period is three years, Gildehaus said people can “sparingly” consider small investments in high-quality, short-term corporate bonds through a bond mutual fund.

Pay off your debts, especially those with high interest rates. It starts with credit card bills, because APRs on credit cards are closely tied to Fed action. Carrying over sales from month to month will become more expensive as rates continue to climb, experts have previously told MarketWatch. Of course, avoiding debt is easier said than done when inflation beats wage increases.

More than two in 10 people (22%) said they expect to incur credit card debt in the next six months, according to a recent LendingTree survey. A third of these people have a good FICO FICO,
-8.96%
credit scores ranging from 670 to 739.

Don’t forget your credit score. When lenders determine loan approvals, rates and terms, their calculations incorporate macro-level considerations regarding interest rates and economic conditions. But they also assess the creditworthiness of the borrowers themselves. High debts and missed payments can hurt a score and tarnish a lender’s opinion.

The same goes for new lines of credit for a major purchase before a mortgage, Gildehaus said. It may be tempting for some people to consider substituting things like buying a car or a loan for a home improvement project for financing furnishings as they hope to secure better mortgage rates.

But timing is important, noted Gildehaus. Mortgage lenders extend pre-approvals on the financial picture of the applicant they have in front of them and if that picture changes in the run-up to the purchase, they can either switch to less favorable terms or potentially deny the request, he said.

Find a way back. Staton tends to go ahead with bigger purchases like a house now, as long as the buyer is financially ready to do so. (By this he means that you currently spend no more than 50% of your income on housing, food and basic necessities; 30% on discretionary purchases; and that you save 20%, and that in addition to that, you have the money to cover a 20% down payment plus closing costs, moving costs, furnishings and other incidentals, he said.)

But if potential buyers pause, they should lock in to a specific metric, like an interest rate or income amount, that will serve as a threshold for when they return to the search. “You really just have to pick a goal and hold yourself accountable to it. The perfect rate, the perfect house, the perfect time don’t exist,” Staton said.

Remember that when you start searching again, it won’t be the same. Interest rates are a variable, and there are no guarantees as to when and how quickly they will fall, Staton said.

The prices of big-ticket items won’t necessarily drop either. The appreciation in housing prices is “unsustainable,” said Steve Rick, chief economist at CUNA Mutual Group, a provider of financial services to credit unions and their customers. Price growth will slow in the near future, but affordability issues will persist, he said. “As interest rate hikes put pressure on consumers, the United States still faces a housing crisis,” Rick said.

Car prices reflect the same dynamic. In June, the typical monthly payment for a new car hit a record high of $730, according to Cox Automotive/Moody’s analysis this month which takes into account interest rates, prices and incentives.

What to know if you’re going ahead with a big purchase in the face of rising interest rates

Don’t rush for emotion. It can help to accelerate spending plans to get ahead of even higher rates, and Pepperday has seen that happen. But regardless of the economic context, it comes down to separating needs and wants, he said.

“If you have a running house or car now that works, but you ‘want’ to upgrade it, it may be worth the wait because rates will likely drop in the future as inflation escalates. will cool,” he said. If it’s a need, however, it’s important to eliminate the emotion and figure out what you can afford to pay.

One way to do this is to calculate the exact monthly mortgage or car payment you can afford, then draw a clear line there; only consider homes or vehicles up to this amount. In other words, Pepperday said, beware of the dangers of attaching yourself to something you can’t afford and trying to convince yourself that you can do it.

Remember the possibility of future refinancing. The interest rate homebuyers get now on their mortgage doesn’t have to be the rate they always get, Staton and Pepperday noted. Enter mortgage refinance. As Staton noted, there’s a saying circulating in the real estate banking world: “Marry the house, date the rate.”
If a person can afford to take the leap, he said it’s worth remembering the gist of the saying.

Given the rate situation, it is not surprising to see a lull in refinancing after a surge at the start of the pandemic when rates were at historic lows. In mid-July, a gauge on refinance activity hit a 22-year low, with refinance applications falling 4% week-over-week and 80% lower than there were. is one year old, according to the Mortgage Bankers Association.

About Melanie Tweed

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