Sometimes, you want to wait for something to come down – a fever, a price on a video game system, etc. However, it might not be a good decision to wait until mortgage rates come down. Here’s the reason.
If you’re decision to wait is 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.
You see, 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.
A quite popular option which many buyers are considering nowadays is to purchase the home 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.
You won’t only have lower payments with the ARM, but you as the buyer also OWN the home, and can benefit from the appreciated prices which will build equity in the home and increase their net worth.
Facts are, mortgage rates have definitely increased by over 3% over the first 3 quarters of this year. And, some would-be buyers are absolutely wishing they had a do-over so they could get a home at a lower rate. The current differential between the fixed and adjustable rates could lower the monthly payment.
Another fact: that lower adjustable rate could save a buyer $300 a month during the first period of five years. That’s quite significant! Plus, at any point during that period, they could refinance at a better interest rate should it become available. The one issue is 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. It isn’t a secret that 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.
So, the idea is that once inflation is under control and back to acceptable levels, the rates should lower.
But home prices are a different situation. You see, 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.
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