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Just because mortgage rates and home prices have increased doesn’t necessarily mean it’s a bad time to buy. Read on to learn why.
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Even though they have stabilized recently, home prices are up sharply over the past few years. And not only that, but mortgage rates are hovering near their highest level in years. This has caused many would-be home buyers to stay on the sidelines, but there’s a case to be made that now isn’t necessarily a bad time to become a homeowner.
Your mortgage rate isn’t necessarily forever
As of this writing, the average mortgage rate in the United States is just under 7% for a 30-year fixed-rate loan. However, many home buyers view this with the mentality that they are stuck with this rate for the entire 30-year loan term.
However, one of the best features of mortgages is the ability to refinance them. In fact, billionaire Warren Buffett, who is notoriously against taking on debt, makes a special exception for the 30-year fixed-rate mortgage, which he has called one of the best tools available to American consumers.
One of Buffett’s favorite things about mortgages is that if rates fall, they are relatively easy to refinance. As Buffett has said, “It’s a one-way renegotiation. It is an incredibly attractive instrument for the homeowner and you’ve got a one-way bet.” In other words, if mortgage rates continue to rise to 10%, your payment won’t go up. But if they fall to 3% again, you can simply refinance and save tons of money on interest.
If the 2020-2021 period is any indicator, there will be lenders lining up to refinance mortgages if and when rates drop. And while refinancing isn’t free (there are closing costs), the long-term savings of even a 1% drop in interest rates can add up to tens of thousands of dollars.
The point is that as long as you can afford the payments, don’t necessarily let relatively high mortgage rates stop you from buying a house.
If rates drop sharply, prices could rise again
Waiting for interest rates to drop might seem like a smart strategy, but there are some experts who say that might backfire.
Most notably, real estate expert and Shark Tank star Barbara Corcoran recently said that if interest rates drop by 2% (to an average 30-year mortgage rate of about 5%), housing prices could jump by another 20%.
She says there’s currently a lack of sellers, who don’t want to have to give up their low mortgage rates. And there are many buyers who are afraid to buy at today’s higher rates. But she said that if interest rates come down, sellers will list their houses and people who are currently renting will come into the housing market and “prices are going to go through the roof.”
It obviously remains to be seen whether Corcoran will be right (or if rates will come down at all). However, it could be a better move to buy at today’s prices and refinance if and when rates drop than wait until rates go down and prices rise — and spend tens of thousands of dollars on rent in the meantime.
The bottom line
The real estate market is slow right now and it isn’t hard to see why. Between home prices that are about 55% higher than they were five years ago and mortgage rates roughly doubling since the beginning of 2022, many people are waiting for a “better time” to sell their home and buy another, or to buy their first home. While nobody has a crystal ball, there’s a solid case to be made that buying your first home now could still be a smart move despite these factors.
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