In today’s Q&A, we’ll address two great questions from readers about shopping for a home in today’s environment. We’ll also talk through how to know if you have enough Parachute Money.
As always, please continue to reach out with your questions on our socials or by replying directly to our weekly newsletter emails. I personally read and reply to every email.
Should I wait for mortgage rates to drop before buying a home?
This question has been on people’s minds for a few years now. Ever since rates started climbing from the all-time lows during the pandemic, people have been hoping they might significantly drop again.
In my humble opinion, that ain’t happening. At least not anytime soon.
Google “Are interest rates going to drop” and you’ll find that nearly every major news outlet and mortgage lender has a prediction. Most predictions right now are about the same. US News summed it up just about perfectly:
Analysts expect the 30-year fixed mortgage rate to stay elevated between 6% and 7% for the next two years. Just two months ago, economists thought it would fall into the 5% range by the second half of 2025. With such wild fluctuations in the forecast, you’d be just as likely to get a satisfactory mortgage rate outlook from a Magic 8 Ball: Cannot predict now. Ask again later.
Nobody knows what’s going to happen with rates. Just two months ago, US News thought rates would drop. Now, they’re expected to stay elevated. What are you supposed to do with that information?
I recommend you ignore it.
My advice is to buy a home when you’ve decided it’s the right moment in your life to do so. Make that decision regardless of what current interest rates are.
Why do I recommend you ignore mortgage rates?
There are really only three things that can happen to mortgage rates over time:
- Mortgage rates stay the same.
- Mortgage rates go up.
- Mortgage rates go down.
In any of those three scenarios, there’s no point in basing your decision to buy a home only on the current rates. Let me explain.
Let’s say you have a crystal ball and can look three years into the future. Looking into your crystal ball, let’s play out each of the three scenarios mentioned above.
1. Your crystal ball shows you that mortgage rates stayed relatively consistent.
Since rates stayed the same, there would be no point in waiting to buy a home because of rates. The rates three years from now are the same as they are today.
By waiting, you’re likely going to experience that homes have gotten more expensive. The longer you wait, the more expensive they are going to be.
The data shows that homes have become more expensive historically and in the recent past. In 2024, U.S. homebuyers paid nearly double what they paid for homes in 1965, accounting for inflation. More recently, in Chicago for one example, home prices are up more than 9% since just last year.
So, even if rates stay the same, prices are likely to go up and you shouldn’t sit around waiting for them to drop.
2. Your crystal ball shows you that mortgage rates went up.
If rates go up, it’s easy to conclude that it’s a mistake to delay your home buying decision. Higher rates, combined with higher prices, is… not good.
3. Your crystal ball shows you that mortgage rates went down.
This is the scenario that many people are waiting for. When rates go down, you can afford a more expensive home. That’s a good thing, right?
Not so fast.
Do you think you’re the only person sitting around waiting for rates to drop? For the same reasons that you’re waiting, many other people are also waiting.
So, what happens when lots of people are waiting to buy the same thing? Demand goes up. When demand goes up, you have more competition to buy that same house. That means prices go up. You’ll end up paying more money for the house, even with a lower interest rate.
Take it from me, bidding wars are not fun. I would much prefer to get the house I want without the added competition.
If mortgage rates end up dropping later on, I’ll refinance my loan into the lower rate. I may pay more on a monthly basis in the short term, but long term, I have the house I want at the best available current rate.
So, there you have it. No matter what happens to rates, in my opinion, you’re best off shopping for a home when the time is right in your life.
Forget about the rates. If rates do end up going down in the future, you can still benefit by refinancing.
My wife and I are considering buying a home that would be the most expensive home ever sold in the neighborhood. Is that a bad idea?
This is another great question. Opinions will certainly vary, so I encourage you to talk to your inner circle to get a variety of perspectives.
Personally, I have no problem buying the most expensive property in a neighborhood, under one condition: I plan on holding that property for at least 10 years.
Like the data above shows, home prices tend to go up historically. Since 1990, home prices nationally have appreciated on average at a rate of 4.4%.
If you’ve done your homework and are shopping for real estate in good neighborhoods, it’s only a matter of time before another home sells for a higher price.
The longer you hold the real estate, the more home appreciation works in your favor.
Appreciation is one of the best reasons to invest in real estate, after all.
When we bought our first rental property in Chicago in 2018, we paid the highest price for any 4-flat in our neighborhood. At the time, we were a bit concerned that we were overpaying. Those worries were short lived. With seven years of appreciation working in our favor, numerous properties have sold since then for significantly more money.
Yes, there are always going to be dips in the market. Do not expect your home to steadily appreciate every year. This is why my one condition is to hold the property for at least 10 years. When you hold property (or any investment) for the long run, time is on your side. You can wait out any dips in the market.
As long as you’ve done your homework and are willing to hold a property for the long run, I would have no hesitations in buying the most expensive property in a neighborhood.
I’m fascinated by the concept of Parachute Money. My question is: how will I know if I have enough Parachute Money?
The idea of Parachute Money is one of my favorite concepts in personal finance. Check out our post here to learn more about how empowering Parachute Money can be.
To know how much Parachute Money you need, look back at your Budget After Thinking. All you need to do is add up your monthly Now Money and Life Money to figure out how much Parachute Money you’ll need to maintain your current life.
For example, let’s say your budgeting process taught you that you need $6,000 of Now Money and $4,000 of Life Money each month. Your Parachute Money target is $10,000.
If your goal is to walk away from your primary job, you’ll need to create $10,000 of income streams not counting that primary job. That could be from any combination of investments and side hustles. Once you hit $10,000 in parachute strings, you should be able to safely walk away from that job.
Note that for calculating your Parachute Money, you can ignore your Later Money goals. The reason why relates back to the purpose of Parachute Money.
The purpose of Parachute Money is to be able to choose to walk away on your own terms while continuing to support yourself.
Presumably, choosing to walk away from a bad situation accomplishes one of your primary goals for saving and investing money in the first place.
At this phase of your life, it’s OK to temporarily set aside your Later Money goals. If and when you choose to seek new sources of income, you can start fueling your Later Money goals again.
The exception to this rule is if you have debt obligations that are not accounted for in your Now Money. If that’s the case, be sure to include your debt obligations in your Parachute Money target.
One last thing about Parachute Money: achieving true Parachute Money is hard. Just remember, the payoff could be extremely valuable to you: not having to work your primary job if you choose not to. That’s the definition of financial independence.
Thanks again for all the great questions!
If we didn’t get to your question this week, we’ll do our best to get to it in an upcoming post.