Is It Better to Wait for Lower Mortgage Rates?

Mortgage interest rates greatly affect the cost of buying a home. Unfortunately, in the post-pandemic era, mortgage rates have been relatively high compared with most of the period between 2009 and 2022.

Today's higher rates have left many people, eager to buy a home, wondering if they should move forward with a purchase or wait until rates drop and financing becomes more affordable.

Unfortunately, mortgage rates can be very hard to predict, so would-be homebuyers have no way to know when or if rates will decline. In light of this uncertainty, you need to carefully consider the pros and cons of waiting to purchase until lower mortgage rates become available.

How Are Mortgage Rates Set?

Both borrower credentials and economic factors affect mortgage interest rates.

A well-qualified borrower is likely to qualify for the best rates available. However, economic forces will determine what the best available rate is, and what the actual costs of financing a home are.

Even the best qualified borrower is not likely to get a loan that's well below current market rates.

Market and Economic Factors

Factors such as inflation, Federal Reserve policy, and economic growth (or lack thereof) will all affect how much lenders charge for mortgage loans.

However, although many people watch the Federal Reserve hoping for rate cuts because they believe this will result in lower mortgage rates, that's not necessarily the case.

The Federal Reserve sets a benchmark interest rate banks pay (or receive) to borrow money overnight, but the benchmark rate doesn't directly impact mortgages.

Instead, fixed-rate home loans typically track closely with the 10-year Treasury Note yield, as Treasury bonds and mortgage-backed securities often compete for the same investors.

Variable-rate mortgages, on the other hand, are generally tied to a benchmark interest rate, such as the Secured Overnight Financing Rate (SOFR)or the prime rate. Some of these may be more directly affected by the Federal Reserve’s rate drops or increases.

Borrower and Loan Type Factors

A borrower's financial situation can also affect how much a mortgage costs.

Borrowers with a solid credit profile, a stable job, limited debt, plenty of income, and other top-notch financial credentials will generally qualify for a lower rate.

Those with poor credit, on the other hand, may not be eligible to qualify for the lowest possible market rates. Exploring mortgage options like FHA, VA, or USDA loans can often allow people to take advantage of lower rates. These options are backed by the government, which means lenders can be more flexible in who is approved and at what rates.

When Do Mortgage Rates Drop?

Mortgage rate changes sometimes happen quickly and frequently. Rates could go up or down when economic changes happen, though. And in other cases, rates remain stable for a long while with only slight deviations if economic conditions remain stable.

Unfortunately, it's hard to predict when a rate drop is likely to come because no one can predict what will happen with all the market conditions that affect rates.

Some financial institutions and other organizations employ experts to analyze economic conditions and make predictions on rates. And you can use their rate forecasting to give you some insight into how rates are likely to trend.

However, these are just estimates that can change, and they may not be 100% accurate in the first place.

How Mortgage Rates Impact Housing Markets

Your mortgage costs are one of the biggest factors that affect home affordability. Home prices are another. Mortgage rates can often have an impact on housing markets because financing costs can affect the demand for homes. Here's how rates often, but not always, affect housing markets.

• When mortgage rates drop: Often, a decline in mortgage rates makes buying a home more affordable because monthly payments decline. This can sometimes increase demand, which in turn drives prices up.
• When mortgage rates go up: When mortgage rates go up, the cost of financing is higher, so people may not be able to afford the payments. Demand for houses can decline, pushing prices down with it.

There is no guarantee how housing markets will always change over time. Many factors affect each specific market, including the supply of homes available, how desirable an area is based on factors like schools and safety, and changes in local markets caused by outside forces (such as zoning changes or gentrification).

You should work with a qualified real estate agent and mortgage professional to understand how rate changes can affect the housing market in your area.

Waiting for Rate Drops vs. Planning to Refinance

When you take out a home mortgage, you are not required to keep that loan for the full repayment term. You can refinance. If mortgage rates drop, you can apply for a new loan to pay off your existing mortgage. This allows you to benefit from falling rates.

For this reason, some would-be homebuyers may decide they are better off purchasing a home sooner rather than later, even though mortgage rates may be higher than they'd like.

Those who decide to buy now despite higher rates can get into a property and lock in today's pricing. If rates drop later and send home prices soaring, they don't have to worry about paying more for a home. They can refinance their current loan to take advantage of the new lower rate, and they'll already have built home equity.

Refinancing also allows borrowers to shift between fixed-rate mortgages and adjustable-rate mortgages, which can be important if you have an adjustable-rate mortgage and you expect rates to increase.

Final Thoughts: Waiting for a Lower Rate to Buy a Home

Waiting for a lower rate to buy a home may seem like a good move because you avoid paying high interest on your loan. However, since no one can know when rates will begin to fall again, and since a rate drop may cause demand for homes to soar, those in a financial position to do so may wish to buy a home sooner rather than later and start building home equity now.

Freedom Mortgage can help you to understand your options for a mortgage and to find the one that fits your needs.