If you’ve thought about waiting until mortgage rates come down until your buy a home, you might not be making the best decision.
Here’s a reason – 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 10/27/22, the 30-year fixed-rate was at 7.08% which is the highest level since April 2002. If the rate drops to 5% in three years but the price increases by 5% a year, a $400,000 home today, will cost $463,050 three years from now.
One very popular option which many buyers are considering is to purchase the home today with an adjustable-rate mortgage that could give them a 5.96% rate for five years. Then, refinance to a fixed-rate when rates come down.
That will not only allow the buyer to 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.
In the last three quarters of this year, mortgage rates have increased over 3%. 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 are substantial and could lower the monthly payment.
Over a period of the first five years, the lower adjustable-rate would save a buyer $323.90 a month. At any point during that period, they could refinance at better interest rate should it become available. But, if the rates do really begin to trend downward, the homeowner might not decide 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.
Since the housing crisis which caused the Great Recession – mortgage rates have been low. The government actually kept them low to build the economy. And then, the Pandemic threatened the economy, and the government spent a tremendous amount of money to bolster the economy 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 however a different situation. Home prices have moderated due to the recent rise in mortgage rates. And, inventories are still low – which means there is a pent-up demand for housing from purchasers unable to buy during the pandemic.
This situation, 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 increase affordability and demand.
If you’re a buyer and feel as if you’ve missed a window of opportunity to buy before rates started increasing, we can talk about financing alternatives that might be available to you.
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