You might be seeing headlines that say mortgage rates are expected to drop near the end of next year, and wondering if it’s best to just wait until then to buy. However, if you’re in a financial position to buy a home now, doing so could save you money in the long run due to the interconnected relationship between mortgage rates, home prices, and market competition. One year isn’t too terribly long to put off the purchase, but before you decide to do, read this.
The Relationship Between Mortgage Rates and Home Prices
Mortgage rates and home prices often have an inverse relationship. In other words, when rates rise, buyer affordability decreases, which can moderate demand and stabilize or reduce home prices. On the other hand, when rates fall, lower monthly payments make homeownership more accessible, which usually leads to an increase in buyer activity and home prices.
As rates go down, the competition in the housing market intensifies. This surge in demand often drives up home prices, eroding some of the affordability gained from lower interest rates. For example, a 1% drop in rates can reduce monthly payments, but the accompanying increase in property values can offset much of the benefit. You’ll see this higher cost in a few areas: the down payment (which is calculated as a percentage of the purchase price, not a set amount), the monthly mortgage, and the equity you build.
In short, waiting for lower interest rates usually means buying the same home at a higher price.
How Waiting for Lower Mortgage Rates Can Cost You More
There are a few ways that waiting can end up costing you. History shows that lower interest rates typically trigger a surge in housing demand. For instance, when rates hit record lows during the pandemic, homebuyers rushed into the market, creating bidding wars and driving up prices significantly. If rates drop again, the same trend could emerge.
Buying now at current prices allows you to avoid future price inflation. While your monthly payments may initially be higher due to today’s rates, refinancing when rates decline could lower those payments over time, enabling you to benefit from current market pricing.
Lower rates attract more buyers, creating fierce competition, especially in desirable markets like Southern California. This increased competition tends to lead to bidding wars that push prices above the asking price. For those who delay, finding an affordable home may become more challenging when rates drop.
In contrast, today’s market conditions, although influenced by higher mortgage rates, are often less competitive. Buyers can negotiate better deals, avoid overpaying, and have greater choice without the pressure of multiple offers.
Planning to Refinance
If you buy now and rates decrease in the future, you have the option to refinance your mortgage. Refinancing allows you to secure a lower rate and reduce your monthly payments, effectively capitalizing on lower rates when they arrive. It’s important to factor in refinancing costs, but the long-term savings often outweigh these expenses. We often help our clients find a refinancing solution that rolls the expenses into the loan so that it costs nothing out of pocket but lowers their monthly payment significantly.
By refinancing, you will benefit from those lower future mortgage rates without missing out on one of the biggest benefits you have working for you: time. The longer you own your home, the more opportunity you have to build equity as it increases in value. Why wait to begin this process if you don’t have to?
The Bottom Line With Mortgage Rates and Purchasing a Home
The bottom line is this: if you can afford to buy now, it’s a better time. Planning on refinancing will allow you to enjoy the best of both worlds: today’s purchase price, and tomorrow’s interest rates when they come.
If you’re financially prepared to buy, with savings for a down payment, manageable debt, and stable income, waiting may not be necessary. If you talk with one of our loan officers are pre-approval, we can help you secure real numbers that will allow you to make a confident decision about buying a home this year or not. Contact us any time to learn more about different mortgage options and what your interest rate might be if you buy soon.
