Marry The House, Date The Rate
With the market as volatile as it’s been, there’s much debate around what this year will bring. Will we switch from a seller’s market to a neutral one? Will we shift all the way to a buyer’s market (at least 6 months of inventory)? Will rates actually drop and if so, by how much?
These are daunting questions if you’re trying to decide when the right time is to buy. Especially so if you’re a first time home buyer. So we did an exercise to help give some context.
One easy way to think about it, is through the old industry chestnut, “Marry the house, date the mortgage”. If you find a home you love that you can comfortably afford the monthly payment, now might be the best time to buy because there’s less competition. And by “marrying” the house, you can always refinance down the road when rates come down. But if you haven’t, than is it worth waiting for rates to come down to get approved for more?
Here’s a hypothetical example to frame up the difference:
The average mortgage size in the US right now is around $425k, and average interest rates today has come down to 6.97% (the difference between your interest rate and APR are the fees from the loan. Your APR is what you’re actually paying, so that will vary). Let’s say that was your loan, these are the details of what you’d be paying:
Your payment would be around $3,486 (just P&I would be $2819. Taxes and insurance varies by state)
In 6 months you’d pay $14,770 in interest
Now let’s say you waited 6 months for rates to come down to 6%. Most likely however there is an increase of competition because everyone else has been waiting in the wings for the same thing. Let’s assume you have to pay more for the same house and your mortgage is now $450k
Your payment would be around $3398 (just P&I would be $2698). A reduction of just $88/mo from the previous scenario
In 6 months you’d pay $13,463 in interest. $1,307 less than the previous scenario
If you were interested in refinancing down the road, there are fees still associated with that but they are dependent on many factors, such as loan amount, location, loan type, etc. Some important factors to note:
Fees can be rolled into your mortgage limiting out of pocket expenses
Some lenders have what’s called “Float-Down” Options (Rocket Mortgage gives a good overview)
Most rates are negotiable in that you can ask lenders to match lower rates from competitors, or you can buy your points down further
Interest paid on a mortgage from a primary or secondary home can be written off on taxes in almost all cases (consult your cpa to confirm).
With inflation still where it is, the Fed and experts continue to watch and guess when rates will come down. Experts in the industry such as as Bank of America, Fannie Mae, and Morgan Stanley predict rates to drop to anywhere between 5.8%-6.3% in 2023, and then further down to mid-5%’s in 2024.
Two realities we have to come to grips with:
Even experts don’t have a crystal ball, leaving these truly as predictions. As proven by recent reactions after the fallout from SVB needing federal support. Rates were expected to be increased and instead they came down to restore confidence.
Rates are highly unlikely to get back to the 2-3% dreamland we’ve had the last few years due to the Covid Pandemic. More likely experts suggest that rates will stay closer to the 20 year average for the next couple of years, around 5.7%
Which brings us back to the question: How to know when the right time is?
The short answer is, if you find a home that you LOVE and can swing the monthly payment then it’s worth going after it while competition is low and you can start building equity, refinancing down the road when rates come back down.
On the flip side, there could be value to waiting if you’re aiming for a higher approval limit, and can take time to save more. The risk is that you’ll have to fight off a larger buyer pool to get it, and the wait might be longer than you think for rates to go as low as you’d like them to.
In either scenario, we’re here to help. In fact, this is a big reason why we exist! Having the right agent who can show empathy and patience to help you figure out what’s right for you. And happily show you properties in the meantime to see if the “one” is out there now.