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10 rate hikes by the Federal Reserve dating back to March 2022 have taken a toll on the housing market. Existing home sales pulled back 3.4% in April, according to the National Association of Realtors. Over the past year, home sales fell 23.2%, while home prices dipped 1.7% to a median price of $388,800. The recent pause in rate hikes, however, has given some prospective buyers some hope that the worse could be over.
The higher interest rates are making it more challenging for prospective homebuyers to purchase homes and homeowners looking to refinance. For the latter, high interest rates make it harder for homeowners to refinance at rates lower than their existing mortgage. Many homeowners refinanced their homes during the pandemic when interest rates were at record lows ranging from 0% to 0.25%. By contrast, the current benchmark range is from 5% to 5.25%, its highest level in 16 years.
When mortgage rates will reverse course is anyone’s guess, but we wanted experts to weigh in. Understanding where interest rates are headed can help homebuyers and homeowners alike better understand the options available to them now and in the future.
Explore your mortgage refinancing options here now and see what rate you qualify for.
When will mortgage interest rates drop?
The recent pause in interest rate hikes has left many cautiously optimistic, although the chances of additional increases later this year are still substantial. Along those lines, organizations like Fannie Mae and the Mortgage Bankers Association forecast that the average rate on 30-year fixed-rate mortgages will decline throughout 2023, continuing into the first quarter of 2024.
“The Fed has recently signaled that it may forego a rate increase at its next meeting while it evaluates the effect its recent increases have had on inflation, but the market still expects the Fed to continue raising rates later this year,” Peter Idziak, senior associate at Polunsky Beitel Green, said ahead of the recent rate pause. “However, if the Fed stops raising because the data shows the economy weakening and inflation coming down further, then I would expect mortgage rates to decrease during the second half of 2023.”
Chief Economist at First American Financial Corp, Mark Fleming, says an interest rate drop may not happen for several months. “Possibly in 2024, but it will depend on the Fed’s decisions about raising rates in the second half of the year,” says Fleming. “And even if they do go down, it won’t be back to the rates of yesteryear. 6% mortgage rates used to be normal, and that’s more reasonable to expect too.”
Adam Sharif, founder and chief strategist of nxtCRE, a platform for commercial real estate investors, agrees. He adds, “If rates go down, it will be next year and not by much. Today’s interest rates are considered normal by historical measures.”
Not sure what mortgage rate you would qualify for in today’s market? You can easily find out here now.
Is now a good time to buy a home?
While rising interest rates disadvantage many homebuyers, they can still present a good opportunity for others to buy a home, particularly investors. If you intend to hold onto a property as a long-term investment, the home’s value may appreciate significantly over time, potentially outweighing the costs of higher interest rates. And if you anticipate a drop in interest rates, you can always choose to refinance your mortgage at a lower rate when available.
“There is some truth to the saying ‘marry the house, but date the rate,'” adds Idziak. “Home inventory is still very constrained in many areas, so a potential buyer who finds a home she loves may be better served by purchasing now even with rates elevated and hope to refinance in two to three years when rates may be lower.”
Similarly, in some scenarios, it may make sense to buy a property for rental purposes, even in a high-interest environment. Depending on rental rates in your area, among other factors, the income generated from your rental could offset a portion, if not all, of your mortgage expenses. Additionally, you might be able to leverage the tax benefits of owning a rental property.
Is it a good idea to refinance my mortgage?
Refinancing a mortgage means you’re replacing your existing home loan with a new one, ideally with a lower interest rate. With rates around double what they were in 2020, refinancing may not be the best option for anyone who took out their existing mortgage before the Fed began its aggressive rate hike schedule.
“For borrowers who refinanced during the historically low rates from 2020 to 2022, it might not make sense to refinance in the current rate environment,” says Idziak. “However, borrowers that can take advantage of the increase in home values over the last few years may still find it advantageous to refinance in order to tap equity in the home or to remove private mortgage insurance.”
There are other scenarios in which refinancing might prove beneficial, such as:
- If you want to pay off your mortgage loan sooner. Refinancing your home loan from a 30-year to a 15-year term could potentially result in significant overall cost savings, despite higher interest rates. Keep in mind, shorter loan terms tend to have lower interest rates than mortgages with longer terms.
- If you want to convert an adjustable-rate mortgage (ARM). Homeowners with adjustable rate mortgages (ARMs) who face the potential of fluctuating monthly payments might consider transitioning to the stability of a fixed-rate mortgage.
- If you want a lower interest rate. Again, this may not be an option for many homeowners. Still, some homeowners may have higher interest rates on their existing mortgages than lenders currently offer. For example, they may have secured their mortgage when rates were higher, or perhaps a lower credit score at the time of their loan application resulted in a high-interest mortgage.
Explore your mortgage refinancing options here now to see if it makes sense to act.
The bottom line
Watching interest rate trends can help homebuyers and homeowners better understand the market so they don’t make decisions blindly. However, attempting to time the market isn’t always the best strategy for any type of investing, including real estate. Basing decisions based on your budget and goals may be a better approach. Before you make a decision, do your due diligence and run the numbers to determine how much you’ll pay and what you could save.
