Waiting for the Mortgage Rates to Come Down
December 12, 2022
Waiting for the mortgage rates to come down before you buy a home may not be a good decision.
If you are correct, and the rates do come down by two percent, the savings you benefit from a lower rate will most likely be devoured by the appreciated price increase.
As of 12/8/22, the 30-year fixed-rate was at 6.33% which is close to the highest level since mid-2008. If the rate drops to 4.7% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.
An increasingly, popular option that more buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.00% rate for five years. Then, refinance to a fixed rate when rates come down.
Not only will the buyer have lower payments with the ARM, but the buyer will also own the home, and benefit from the appreciated prices which will build equity in the home and increase their net worth.
Mortgage rates have increased over 3% in the first three quarters of this year. Some would-be buyers are wishing they had a do-over so they could get into a home at a lower rate. The current differential between the fixed and adjustable rates could lower the monthly payment.
The lower adjustable-rate could save a buyer $300 a month during the first period of five years. At any point during that period, they could refinance at a better interest rate should it become available. However, if the rates do start trending down, the homeowner might decide not to refinance because the rate on the ARM would have to go down at the next adjustment period to reflect the lower of rates in the market.
Mortgage rates have been low since the housing crisis that caused the Great Recession. The government kept them low to build the economy. Then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster it which led to inflation which is what is causing the rates to increase currently.
When inflation is under control and back to acceptable levels, the rates should lower.
Home prices are a different situation. The recent rise in mortgage rates has caused home prices to moderate because it affects affordability. Inventories are still low and there is a pent-up demand for housing from purchasers unable to buy during the pandemic.
This coupled with millennials reaching household formation age and insufficient home building to keep up with demand for the last decade, prices are expected to continue to rise. The rate of appreciation could even increase when rates come down which would also affect affordability and demand.
Buyers who feel they missed a window of opportunity to buy before rates started increasing should investigate financing alternatives.