Buying a Home in the Next Year? Here’s How Much Room to Build Into Your Budget

If you’ve been thinking about buying a home, you already know how much mortgage rates can change the conversation.

The 30-year fixed mortgage rate recently hit 7.5%, and a move like that can have a much bigger impact on your buying power than most people realize.

Here in San Diego, where the median list price is approximately $985,000, even a relatively small change in mortgage rates can mean hundreds of dollars a month in your payment.

I know rates have a lot of San Diego buyers feeling stuck right now. You may be wondering whether you should buy now, wait for rates to come down, or whether you’ll even be able to afford the same home six months from now.

The problem is, none of us knows exactly where rates will be six months or a year from now.

So rather than trying to predict them, I think there’s a better approach: plan for some movement in either direction.

Realtor.com looked at more than 20 years of mortgage rate data and came up with a helpful framework for doing exactly that.

For the examples below, let’s use a $985,000 San Diego home with 20% down, which means financing approximately $788,000.

Buying Within the Next Year? Plan for a 1% Change

If you think you’ll buy sometime within the next 12 months, Realtor.com’s data suggests planning for mortgage rates to potentially move about one percentage point, or 100 basis points, in either direction.

Historically, rates haven’t moved dramatically during most 12-month periods. In fact, they stayed within 0.25% of where they started nearly 30% of the time.

But we all know “most of the time” isn’t much comfort when you’re the one buying the house.

That’s why I’d rather see buyers plan conservatively.

Here’s what a 1% change in rates looks like on our San Diego example:

• At 6%, principal and interest would be approximately $4,725 per month.
• At 7%, it would be approximately $5,243 per month.
• At 8%, it climbs to approximately $5,782 per month.

That’s a difference of more than $1,050 per month between 6% and 8%, on the exact same house.

Over the course of a year, that’s more than $12,000.

And remember, that’s just principal and interest. Property taxes, homeowners insurance, HOA fees and other housing expenses would be additional.

That’s why buyers who are a year away from purchasing shouldn’t base their future home search solely on what they qualify for today.

Buying Within Six Months? Plan for a 0.75% Change

If you’re planning to buy within the next six months, historically there’s been less rate movement.

Realtor.com found that the middle 80% of six-month rate changes fell between approximately 0.63% lower and 0.63% higher.

To keep things simple, planning for about a 0.75% change in either direction gives you a reasonable cushion.

Using that same $985,000 San Diego home with 20% down:

• At 6.25%, principal and interest would be approximately $4,851 per month.
• At 7%, it would be approximately $5,243 per month.
• At 7.75%, it jumps to approximately $5,646 per month.

That’s a difference of almost $800 per month between 6.25% and 7.75%.

This is exactly why I don’t want buyers qualifying at today’s rate and assuming that number will still work six months from now.

If buying is on your radar, let’s run the numbers at a few different rates now so you know exactly where your comfort zone is.

Buying Within Three Months? Plan for About a Half-Point

Once you’re within about three months of buying, historically the range gets even tighter.

Realtor.com found that the middle 80% of three-month rate changes ran from approximately 0.40% lower to 0.45% higher.

So if you’re getting close to buying, planning for about a 0.50% change in either direction makes sense.

Using our same $985,000 San Diego home:

• At 6.5%, principal and interest would be approximately $4,981 per month.
• At 7%, it would be approximately $5,243 per month.
• At 7.5%, it increases to approximately $5,510 per month.

That’s a difference of more than $500 per month between 6.5% and 7.5%.

The closer you get to buying, the more accurate your numbers become. But until your interest rate is actually locked, there is always some uncertainty.

Don’t Just Ask, “What Can I Afford Today?”

This is really the conversation I want buyers to have.

Instead of only asking your lender:

“What can I qualify for today?”

I want you to also ask:

“What happens to my payment and purchasing power if rates go up another half-point or even a full point?”

Then run those numbers.

If the payment still works, great. If it doesn’t, I’d rather know that before we start falling in love with houses.

There are also strategies we can look at if rates move against you, including seller concessions, rate buydowns, adjusting your down payment, or changing the price range we’re targeting.

And sometimes the answer is simply waiting until the numbers make more sense for you.

What You Can Do Right Now to Protect Your Budget

Whether you’re planning to buy in three months or a year, there are a few things I’d encourage you to do now:

• Run your payment at several different interest rates, not just today’s rate.
• Decide what monthly payment you’re actually comfortable with, not simply what a lender says you qualify for.
• Ask your lender about options like rate buydowns and how seller concessions could potentially help.
• Pay down revolving debt where you can. Improving your debt-to-income ratio can give you more flexibility.
• Keep some room in your budget. Owning a home comes with expenses beyond the mortgage payment.

Most importantly, start the conversation early.

You don’t need to be ready to write an offer before talking to a lender or a real estate agent.

The Goal Isn’t to Perfectly Time the Market

I say this all the time: none of us is going to perfectly time the housing market.

The same goes for mortgage rates.

You could wait for rates to fall and watch home prices move higher. Rates could come down and bring more buyers back into the market, increasing competition. Or you could buy now and potentially have an opportunity to refinance later if rates improve.

There are simply too many moving pieces to make a decision based on one number.

What we can do is make sure you’re buying a home you can comfortably afford, with enough room in your budget that a change in rates doesn’t completely derail your plans.

If buying a home in San Diego is somewhere on your radar for the next three to twelve months, let’s start the conversation before you start touring homes.

I’d much rather help you understand the numbers and build a plan now than have you find a home you love and hit a wall at the finish line.