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Mortgage rates are falling
Mortgage rates have already begun to decline from recent highs, largely due to the prospect of an economic slowdown caused by the Federal Reserve. The average rate for a 30-year fixed-rate mortgage fell to 6.35 percent on Aug. 29 from 6.46 percent a week ago, the lowest mortgage rates in 15 months, according to Freddie Mac.
“Aspiring homebuyers are likely to get a much more attractive interest rate today than they would have just a few months ago,” said Jacob Channel, senior financial analyst at LendingTree.
But many homebuyers are anchored by the fact that mortgage rates bottomed out just a few years earlier after the Fed lowered its key rate to near zero, according to Dottie Herman, a vice president at Douglas Elliman.
“I’ve been in the business 30 years and I’ve never seen 2.5% to 3% in my life, except during the pandemic – I’ve never seen those rates unless it was a government loan.”
Such “relevance bias” can stand in the way of opportunities, he added. “I bought a house when [the mortgage rate] it was 15% and then I refinanced.”
Funding is key
For anyone considering buying now and refinancing later, it’s important to understand the rewards and risks, and what type of mortgage to take out.
For starters, unless a buyer has the cash to pay for a home outright, most homebuyers must finance the purchase of a home.
“Whenever you take out any loan, you need to be aware of the upside as well as the potential risks you may be taking on,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
A zero mortgage, also known as a no down payment mortgage, allows you to finance 100% of the cost of the home. Such loans can be attractive because you can essentially enter home ownership with no down payment.
But you might want to think twice before accepting such an offer, experts say.
Banks and lenders essentially offer two loans to cover the purchase of a home, Cohn said.
The first mortgage covers about 97% of the cost while the second mortgage fills in the extra 3%, he explained.
And those 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 tempting is “buy now, refinance for free later” mortgages. However, you never really escape closing costs, according to Cohn.
“You end up paying a higher interest rate because you’re basically financing your own closing costs,” Cohn said.
In other words, there is no such thing as a free lunch.
“No bank is ever going to give you a real loan with no closing costs at the lowest possible rate. It just doesn’t exist,” Cohn said.
And buying to refinance always means a bet on mortgage rates, which comes with a certain amount of risk.
Is It the Right Time to Buy a Home?
“If you can afford a home, based on interest rates and the market price, buy now,” said Michael Krowe, director of financial planning at Edelman Financial Engines.
Although the recent declines in mortgage rates may increase as the Fed lowers its benchmark rate, Lower mortgage rates could also boost demand for housing, which would push prices higher.
“It may not make sense to delay the purchase if you can afford it today,” Krowe said.
Exactly what will happen in the housing market is “up in the air” depending on how much mortgage rates fall in the second half of the year and the level of supply, according to LendingTree’s Channel.
“Market timing is virtually impossible,” he said.
Home hunters who are ready to buy a home may benefit from refinancing later, but there are no guarantees. Waiting for a better price also comes with the possibility of having to pay a higher purchase price.
After all, “there is no perfect time to buy,” according to Douglas Elliman’s Herman.
“If you want to buy a house and you find something you like, go for it,” he said.
