On the House: Why You Should Consider Buying a Home Before Mortgage Rates Fall

by Garcia Chris
5 minutes read
On the House: Why You Should Consider Buying a Home Before Mortgage Rates Fall

Q: Should I wait for mortgage rates to fall before I start looking for a home?

There are likely millions of aspiring homebuyers diligently biding their time until mortgage interest rates fall into the low 6%—or even 5%—range before they jump into the housing market.

However, doing so might wind up costing you more than if you’d bought when rates are higher. Waiting might even make it more difficult for you to find a home that meets your needs—and then beat out the competition to emerge with the winning bid.

On the surface, waiting for rates to fall might seem like a sound financial plan.

If rates fell from 7% to 6%, buyers would save just over $221 a month on the mortgage payment of a median-priced home. (This assumes a 20% down payment on a $420,000 home and financing through a 30-year fixed-rate mortgage.) If rates dropped to 5%, they would save more than $430 a month.

However, if you’re considering entering, or reentering, the market once rates go down, you won’t be alone. Each time mortgage rates fall a half-point or a point, more buyers will be able to qualify for mortgages and larger loans. That’s going to lead to a whole lot more buyers competing for a limited number of homes for sale.

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Over the past few years, we’ve seen what happens when demand exceeds supply: Bidding wars erupt, prices spike, and first-time buyers competing against investors and older buyers often lose out. Higher prices have the potential to wipe out any potential savings provided by lower mortgage rates.

We expect to see this play out again, provided the economy remains strong and there aren’t any unexpected catastrophes.

While lower rates could encourage more homeowners to list their homes, those properties are likely to be swarmed by buyers. Ironically, lower mortgage rates could worsen the housing shortage, especially if demand exceeds supply.

Whatever is listed—provided it’s in good condition, in an area where buyers want to be, and is priced well—could sell very quickly, like what happened during the COVID-19 pandemic when some homes sold in just a few days.

These are things that determined first-time buyers should consider. Rates have already fallen to an average 6.61% in the week ending Dec. 28, according to Freddie Mac. The Realtor.com® economic research team anticipates rates will drop even more to about 6.5% by this time next year. That is likely to entice many would-be buyers off of the sidelines.

Now, I’m not encouraging anyone who can’t comfortably afford the monthly payments at today’s rates to buy a home. I’m not a proponent of stretching financially to purchase a home you can barely afford. Homeownership is so much more expensive than most first-time buyers imagine. Expensive emergencies can strike at any moment—and will—and when they do, you’ll want to make sure you have enough in the bank to cover whatever might arise.

Instead, I would advise those who can’t afford a home just yet to continue saving and explore ways to increase your income, look into house hacking, and consider smaller homes and those located in cheaper areas.

For those who can afford today’s mortgage rates, it might be a good time to see what’s on the market. The very end and very beginning of the year have traditionally been slower, with less competition from other buyers. And while there’s often not as many homes for sale, motivated sellers might be more willing to negotiate if they don’t have multiple offers.

If you purchase today and rates go down a point or two, you can consider refinancing your mortgage. The process often costs a few thousand dollars, but it can save homeowners much more depending on how much rates have fallen.

Even if you wait until rates come down, getting prepared to become a homeowner now can give you an edge when the market heats up.

Try to save up what you can for a down payment, clean up your credit score so lenders will look more favorably on your application, and pay off debt so you can qualify for a larger loan.

You can also start touring homes and exploring neighborhoods. Check how much the homes you liked sold for and if they went for more than the asking price and how quickly they went under contract. This way you’ll have a better idea of what you’re looking for in a home, how much you should expect to spend, and the communities in which you would like to live.

When the time comes to make an offer on a home, you will be ready.

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If you have housing questions you’d like answered, email them to OnTheHouse@realtor.com for consideration.

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