Mortgage rates are a hot topic in the housing market right now, as they have started to come down from recent highs. This decrease is largely attributed to the prospect of an economic slowdown induced by the Federal Reserve. According to Freddie Mac, the average rate for a 30-year, fixed-rate mortgage dropped to 6.35% on August 29 from 6.46% a week ago. This marks the lowest mortgage rates have been in 15 months, presenting a prime opportunity for potential homebuyers to secure a more attractive rate compared to just a few months ago.
Jacob Channel, senior economic analyst at LendingTree, highlights the benefits of taking advantage of the current low mortgage rates. He states, “Would-be homebuyers are likely going to get a much more attractive rate today than they would have just a few short months ago.” Despite this positive outlook, many home shoppers may be hesitant to act due to the memory of rock-bottom mortgage rates seen a few years ago when the Fed reduced its benchmark interest rate to near zero. Dottie Herman, vice chair at Douglas Elliman, reflects on this sentiment, saying, “I’ve been in the business 30 years and I’ve never seen 2.5% to 3% in my lifetime, other than during the pandemic — I never saw those rates unless it was a government loan.”
This sense of “relativity bias” can hinder potential opportunities for homebuyers, as Herman further explains, “I bought a house when [the mortgage rate] was 15% and then I refinanced.” It’s crucial for individuals to not let past rates dictate their decisions now, as the current market presents a unique chance to secure favorable mortgage terms.
Financing Considerations
When contemplating buying a home and potentially refinancing later, it’s essential to understand the rewards and risks associated with different types of mortgages. For most homebuyers, financing is a necessary step unless they can pay for the house upfront. Melissa Cohn, regional vice president of William Raveis Mortgage in New York, emphasizes the importance of being aware of the positives and potential risks when entering into any loan agreement.
One option that may catch the eye of buyers is a zero-down mortgage, which allows financing for 100% of the home’s cost. While this can be appealing for those looking to enter homeownership without a down payment, experts caution against jumping at this offer without considering the implications. Cohn explains that banks and lenders typically split the loan into two parts, with the first mortgage covering around 97% of the cost and the second loan making up the remaining 3%. It’s important to note that these types of loans may become due and payable if the home is sold or if the mortgage is refinanced in the future, as Keith Gumbinger, vice president of HSH.com, adds.
Another enticing option is the “buy now, refinance for free later” mortgages, which promise no closing costs upfront. However, Cohn warns that there is no such thing as a free lunch in the mortgage world. She points out that buyers end up paying a higher rate to finance their own closing costs, making it crucial to weigh the long-term financial implications before opting for this type of loan. Buying with the intention of refinancing down the line also involves a gamble on mortgage rates, which comes with its own set of risks.
Timing and Decision-Making
The question of whether now is the right time to buy a home is a common dilemma for potential buyers. Michael Krowe, director of financial planning at Edelman Financial Engines, advises that if individuals can afford a home based on interest rates and purchase price, they should consider buying sooner rather than later. While recent declines in mortgage rates may continue as the Fed adjusts its benchmark rate, lower rates could also drive up homebuying demand and subsequently push prices higher.
Krowe emphasizes the importance of not delaying a purchase if one can afford it now, as predicting the future of the housing market is uncertain. Jacob Channel from LendingTree echoes this sentiment, stating that timing the market is virtually impossible, and house hunters who are ready to purchase a home may benefit from refinancing later, although there are no guarantees. Waiting for a better rate also comes with the risk of facing a higher purchase price in the future.
In the words of Douglas Elliman’s Dottie Herman, there is no perfect time to buy a home. If individuals find a property they love and can afford, Herman advises them to seize the opportunity. It’s crucial to weigh the pros and cons of the current market conditions and make an informed decision that aligns with one’s financial goals and long-term plans.
As the housing market continues to evolve and mortgage rates fluctuate, it’s essential for potential homebuyers to stay informed and consider all factors before making a significant financial commitment. By evaluating financing options, understanding the risks involved, and keeping an eye on market trends, individuals can make educated decisions that best suit their needs and aspirations in the realm of homeownership.
