The Good Brigade | Digitalvision | Getty Images
Mortgage rates are falling
Mortgage rates have already started to come down from recent highs, largely due to the prospect of a Federal Reserve-induced economic slowdown. The average rate for a 30-year, fixed-rate mortgage dropped to 6.35% on August 29 from 6.46% a week ago, the lowest mortgage rates have been in 15 months, according to Freddie Mac.
“Would-be homebuyers are likely going to get a much more attractive rate today than they would have just a few short months ago,” said Jacob Channel, senior economic analyst at LendingTree.
Still, many home shoppers are anchored to the fact that mortgage rates hit rock bottom only a few years earlier after the Fed slashed its benchmark interest rate to near zero, according to Dottie Herman, vice chair at Douglas Elliman.
“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.”
Such “relativity bias” can stand in the way of opportunity, she added. “I bought a house when [the mortgage rate] was 15% and then I refinanced.”
Financing is key
For anyone considering buying now and refinancing later, it’s important to understand the rewards and the risks, as well as which type of mortgage to take out.
For starters, unless a buyer has the cash to pay for a house outright, most homebuyers need to finance the purchase of a home.
“Anytime you get into any loan, you need to be aware of the positives and also the potential risks that you may assume with that,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
A zero-down mortgage, also known as a no down payment mortgage, allows you to finance 100% of the cost of the home. Such loans can be appealing because you can essentially enter homeownership without a down payment.
But it may be good to think twice before taking such an offer up, experts say.
Banks and lenders are essentially offering two loans to cover the purchase of a house, Cohn said.
The first mortgage covers about 97% of the cost while the second loan completes the additional 3%, she explained.
And these loans often become due and payable if the home is sold or if the mortgage is refinanced at some point in the future, added Keith Gumbinger, mortgage expert and vice president of HSH.com.
Another loan that can be enticing are “buy now, refinance for free later” mortgages. However, you never truly escape closing costs, according to Cohn.
“You end up paying a higher rate because you’re basically financing your own closing costs,” Cohn said.
In other words, there’s no such thing as a free lunch.
“No bank is ever going to give you a true no closing cost loan at the lowest possible rate. It just doesn’t exist,” Cohn said.
And buying with the goal of refinancing is always taking a gamble on mortgage rates, which comes with a certain amount of risk.
Is this the right time to buy a home?
“If you can afford a home, based on interest rates and the purchase price, buy now,” said Michael Krowe, director of financial planning at Edelman Financial Engines.
Even though recent declines in mortgage rates may gain steam as the Fed lowers its benchmark rate, lower mortgage rates could also boost homebuying demand, which would push prices higher.
“It might not make sense to delay the purchase if you can afford it today,” Krowe said.
What exactly will happen in the housing market “is up in the air” depending on how much mortgage rates decline in the latter half of the year and the level of supply, according to LendingTree’s Channel.
“Timing the market is virtually impossible,” he said.
House hunters who are ready to purchase a home may benefit from refinancing later, but there are no guarantees. Holding out for a better rate also comes with the possibility of having to pay a higher purchase price.
Ultimately, “there’s no perfect time to buy,” according to Douglas Elliman’s Herman.
“If you want to buy a home, and you find something you like, get it,” she said.
