In Your Best Interest:
Waiting for Rates to Drop Vs. Buying Now and Refinancing Later
In a perfect world, consistently low mortgage interest rates coupled with low housing prices would provide consumers with an ideal scenario in which to take the leap into home buying at any time. However, in our not-so-perfect world, the marriage of simultaneously low rates and low prices isn’t always possible.
The current real estate market is one in which mortgage rates have climbed in response to the Federal Reserve hiking short-term interest rates in 2022 and 2023 to combat rising inflation. This has left buyers with a key decision to make: Should I hold off on purchasing a home until after interest rates drop, or bite the bullet and buy now, with plans to refinance down the road?
There’s no easy answer to this question and, as a homebuyer, you may find yourself on the receiving end of a deluge of advice on the topic — both solicited and unsolicited! With so much conflicting guidance, what’s a homebuyer to do?
Let’s take a closer look at the factors you’ll want to consider when determining whether to act now or press “pause” on your home purchase.
The Impact of Interest Rates on Home Ownership
Interest rates are simply the amount you’re charged to take out a mortgage and pay over time as part of your monthly mortgage payment. While the housing market is constantly changing, there are some general guidelines that affect home ownership. One is that interest rates and house prices typically have an inverse relationship.
When the Fed raises interest rates, the housing market slows down and home prices and demand start to fall as buyers are hesitant to pay for more expensive houses. Conversely, when mortgage rates are low, home prices and demand start to rise since buyers have more money to spend. This is not a hard and fast rule. As interest rates rise, for example, home prices don’t always drop as fast or as much as anticipated.
Throughout the years, interest rates have been affected by a variety of factors, including the COVID-19 pandemic, which caused rates to drop to a low of 2.68% in 2020. They’ve been steadily on the rise since then, but it’s important to look at the big picture and consider interest rates from a historical perspective. Take, for instance, the year 1981, when rates hit an all-time high of 16.63% in response to a recession caused by an oil embargo.
When comparing today’s rates to those of past decades, you’ll see that the current rates (over 7% for a 30-year fixed mortgage) are still low by comparison. A look at all the historical mortgage rate data available from Freddie Mac shows that, except for the 1980s spike, rates have gotten lower every decade, until now. And it helps to remember that federal interest rates, and the mortgage rates influenced by them, are cyclical.
Pros and Cons of Waiting for Interest Rates to Drop
By now, you may be wondering whether it makes sense to hold off on purchasing that home you’ve been eyeing until interest rates come down. After all, when you’re dealing with such a significant loan amount, even a small difference in the interest rate can have a big impact on your finances. The primary potential benefit to waiting is scoring lower monthly mortgage payments. And, when buying your home at a lower interest rate, you’ll save in long-term interest costs.
Although smaller mortgage payments and greater savings each month may sound enticing, there are drawbacks to the “wait it out” approach. First, consider the uncertainty in market trends. No expert can predict the future with 100% certainty, and rates could remain higher than you desire for longer than expected. Even if rates do come down this year, a slow and steady decrease is more likely than a steep drop.
Of course, the biggest disadvantage to waiting for interest rates to fall is that you may lose out on the home of your dreams. Are you prepared to watch another buyer win the home you’ve pictured yourself and your family living in? Keep in mind that when rates fall, you’ll likely have even more buyers to contend with.
Pros and Cons of Buying Now and Refinancing Later
An alternative to waiting for interest rates to drop is to purchase your dream home now, with plans to refinance your mortgage at a better rate in the future. Since the principal cost of a mortgage does not change, you can lock in a home at today’s lower home prices and take advantage of an increasingly buyer-friendly market.
Taking the leap also means you can start to reap the benefits of homeownership, with the potential for increased property values over time and, ideally, decreased interest rates down the road. Buying now also allows you to settle into your home, begin building equity and take advantage of other homeownership benefits, such as tax deductions from the interest you pay on your mortgage.
In addition to lowering your monthly payment and saving you money on interest over the life of your loan, refinancing can help you pay off your mortgage sooner and draw from your home’s equity if you need cash. Again, as the market is unpredictable, interest rates may not drop enough to make refinancing worth it. Plus, being faced with higher mortgage payments in the interim can impact your finances and make other areas of your life less affordable.
Tips for Making an Informed Decision
Determining the best time to purchase a home is a serious decision that goes beyond market conditions. It’s a choice that should be personalized to you and your financial circumstances. Remember that market predictions and expert opinions should be taken with a grain of salt, as there’s no way to predict precisely how the market will behave in the future.
Still, there are actions you can take to help you make an informed decision about the timing of your home purchase. These recommendations include:
- Assess your personal goals and finances – Perhaps the most important factor in deciding whether to buy now or wait is your personal financial situation. Be sure to consider your long-term goals and ask yourself how buying a house would fit into your overall financial plan, as well as how long you plan to stay in the area. Do you have a stable income, good credit score and enough money saved for a down payment, closing costs and potential emergencies? Factor in the costs that go beyond your mortgage, such as property taxes, insurance, maintenance, and utilities.
- Consult with real estate and mortgage professionals – Talking to professionals who have their finger on the pulse of real estate and market trends is another good way to determine when to buy a home. Experienced local real estate agents and mortgage brokers can help you figure out whether buying under today’s market conditions makes sense or not.
- Utilize online resources for market analysis – Several online resources can also help with your decision by providing housing statistics and real estate market trends. Helpful websites include the National Association of REALTORS® (www.nar.realtor), Freddie Mac (www.freddiemac.com) Plus, Vanguard Title offers a Closing Cost calculator tool at https://vgtitle.com/resources/rate-calculator.
No Matter When You’re Ready to Make Your Move, Vanguard Is Here for You
At Vanguard Title, we know there isn’t a one-size-fits-all answer to whether now is the right time to buy a home. And we recognize that buying or selling a home is one of the most important and complex decisions you’ll make. Fortunately, you can rest assured, knowing we’re here to help you come up with a strategy, recommend lenders and realtors that will guide you through the process.
Vanguard has successfully closed thousands of real estate transactions throughout the state of Michigan since 1987, and we’re now serving all of Florida. Our team of knowledgeable title and closing specialists has nearly 30 years of experience in the areas of real estate, title insurance, mortgage, and closings. Whether you decide to take the leap now or wait it out, we’re ready to help.