Buying a New Home: A Hedge Against Inflation

Posted on April 20, 2022 in Mortgage FAQ's

Did you know that the annual inflation rate in the United States increased by 8.5% in March 2022 compared to the same month last year? In fact, this has been the highest inflation rate jump since December 1981. 

As inflation rises, the cost of all goods and services rises too, making it harder to afford items one could easily access in the past. So, how can you protect yourself from this? 

Although there is no simple answer, buying a new home during these times of inflation can be a smart financial move. Read on to learn how purchasing a property can be a hedge against inflation. 

Understanding Current Home Interest Rates

You might be thinking, “Why should I invest in a property if the current home interest rates are on the rise?” The truth is, mortgage rates and inflation are pretty connected. If you don’t secure a decent mortgage rate today, there is no guarantee that it won’t go up as inflation continues to impact the economy. Securing a mortgage todayis always cheaper than tomorrow because if rates go up you’re locked in; if rates go down, you can always refinance to get the lower rate.

Of course, many other things affect mortgage rates. Some other market factors affecting rates include:

  • The Federal Reserve
  • The overall health of the economy
  • The bond market
  • Rates like the Secured Overnight Finance Rate and Constant Maturity Treasury Rates

In addition, some personal factors can impact the par rate that you get. This means that lenders might have rates that they can adjust depending on how “risky” you are as a borrower. These are some of the personal factors they will consider: 

  • Your credit score
  • Your loan-to-value ratio
  • The down payment you are planning on putting down
  • The type of investment you are planning to make (i.e., buying a home as your primary residence, an investment property, or a second home)

Understanding what makes mortgage rates change can help you better analyze the current home interest rates and help you determine if right now is a good time to take out a loan.

Remember, inflation also increases property prices, so if you don’t want to risk prices AND rates going up, you should consider talking to professionals and moving fast to secure rates before they continue to increase.  

Getting the Right Mortgage

To get the most out of buying a new home to use as a hedge against inflation, it is essential to get the right type of mortgage loan. Two of the most common loans for homebuyers include the fixed-rate mortgage and the adjustable-rate mortgage. 

What Is a Fixed-Rate Mortgage? 

Let’s say you secured an interest rate of 4.8%. With a fixed-rate mortgage, that is always the rate you’ll pay, regardless of if the rates go up or down. 

This means that if all of the factors mentioned above cause the rates to go up to 6.7%, you’ll still always pay 4.8%. However, the same logic applies if the rates decrease to 4.1%. No matter what happens, if you get a fixed-rate mortgage, you will pay the same rate for the entirety of your loan period. But remember, if it makes sense, you can always refinance to get to a lower interest rate. A good rule of thumb is; that rates would need to drop 1% to justify the costs associated with the refinance based on the amount it would reduce your monthly mortgage payment.

What Is an Adjustable-Rate Mortgage? 

On the other hand, an adjustable-rate mortgage is one where your rate will fluctuate. Usually, you’ll have the same rate for a few years at the beginning of your loan period, but they will change over the years depending on the index to which the loan is tied to. 

Although this mortgage rate often comes with lower rates (at least initially), getting an adjustable-rate mortgage can be very risky. This is especially true in times of inflation. 

Which Mortgage Rate is Better for Your Investment?

Owning hard assets, such as real estate can greatly protect against rising inflation rates. That is why, in times of inflation, getting a fixed-rate mortgage is the way to go. 

Although the rates might seem higher to begin with, getting a fixed-rate mortgage guarantees that your rates will not rise as inflation continues to impact the economy. Because mortgage rates can dramatically rise with inflation, a fixed rate will guarantee that you are protected from any potential increases.

Using Real Estate as a Hedge

Becoming a homeowner can come with many other benefits like giving you more stability and even providing you with some tax advantages. In addition, buying a home can generally also be a very good investment.

However, in times of inflation, especially, owning a hard asset such as a new home can be an incredibly smart financial move. So, now that you know all about what makes interest rates change and which mortgage rate can be more beneficial, let’s discuss why a property is a great hedge against inflation. 

Building Equity

Home equity refers to the difference between your new home’s worth and how much you owe on your mortgage. As you start paying off your loan and as the property appreciates in value, you’ll gain more equity on your property. Once your loan is paid off, you’ll have 100% equity on your property. 

Having home equity can become a huge safety net in a troubled economy. In fact, you can turn your home equity into an equity loan that allows you to purchase another property, pay off any outstanding debt, or invest in your retirement. 

One of the main reasons why investing in real estate during times of inflation is a good idea is that besides building equity every time you make a payment on your mortgage, the economy can actually work in your favor and help you reap the benefits of home appreciation. 

Reaping the Benefits of Appreciation

Remember how we mentioned that inflation raises the prices of goods and services in most industries? Well, this statement can also apply to the real estate market. This means that inflation can be very beneficial to homeowners looking to make a bigger profit out of their new homes. 

As the value of goods and services increases, your home’s value typically increases with it! If you purchase a home today, home appreciation can make you a higher profit if you choose to sell it later on. 

Consequently, investing in real estate can be one of the safest investments you make in general, but especially during periods of high inflation. Think about it this way: if you take some of your money and put it in the stock market during a period of inflation, the chances are that you might lose some of that money because high inflation often leads to lower returns. However, buying a home can do the opposite. 

As property values increase, you’ll be reaping all the benefits of home appreciation! 

Protecting Yourself From Rising Rent

When everything becomes more expensive, landlords also raise the rent. This, of course, is completely understandable- when the economy makes it hard for people to afford basic goods and services, everyone will be forced to make adjustments. 

However, if you own your own property and have a fixed-rate mortgage, you won’t have to worry about making any changes to your monthly budget. No matter how much things increase in price, you can rest easy knowing that your monthly payments will remain the same.

Earning Income From Your Property

If you are not looking to invest in a property to live in it, investing in real estate can still be a fantastic move. As we discussed in the previous section, inflation causes rents to rise. So, if your plan is to purchase a property to rent it out, the inflation can actually work to your advantage. 

Getting a fixed-rate mortgage is still the right move for this type of investment. That way, you can charge a competitive rental fee that still benefits you and helps you pay off your debt. 

Keep in mind that as the economy recovers and inflation settles, you might have to adjust your rent prices as well. However, owning a property and paying off the mortgage means that you’ll still reap the benefits of home equity and appreciation. 

Buying a New Home in Raleigh, NC

Now that you know how buying a new home can help you protect your money against inflation, it might be time to start looking for the right investment. 

At New Home Inc., we can help you find a new home in Raleigh, NC, and help you start reaping all of the benefits of becoming a homeowner. From helping you purchase custom homes to new construction homes in Raleigh, NC, we can help you through every step of your investment.

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