One question I get at least once a week is should someone buy a house now or wait for rates to drop. This is a complicated question, and honestly whoever has the answer is going to make a lot of money. I won’t claim to know what will happen, but I can offer my best guess by using principles of supply and demand. When the federal government increased interest rates to slow the economy it had a two-fold impact on housing. It decreased demand for houses because it was more expensive to borrow money, which is exactly what the feds were wanting to do. It also decreased supply of houses because many people had low mortgage rates on their homes and didn’t want to sell and take on a higher interest mortgage. This caused house prices to jump.
Now let’s look at what would happen if the feds dropped rates. This would increase demand from buyers which would further increase prices. I do think that some sellers would rejoin the market since it would be less costly to move homes and people won’t feel “mortgage trapped”. I don’t believe however that this would be a 1:1 ratio which would keep prices at the current market price, so I suspect prices would increase a bit. Some market experts predict about 10% increase.
Now let’s look at the math to see which options make sense. Using a basic mortgage calculator we’re going to assume a current home is $240,000 and an interest rate of 7.557%. This would equate to a monthly mortgage payment of roughly $1,687 per month. Now let’s assume rates dropped 1% and home prices increased 10%. Assuming a home price of $264,000 and a rate of 6.557%, your mortgage payment would be $1,685 per month. So you would save roughly $2 per month in this scenario. So waiting for rates to drop doesn’t seem to make much of a difference.
The other question I hear a lot, and something all the lenders are quick to advertise, is buying now and refinancing your mortgage when the rates drop. You may have heard the phrase date the rate marry the house. Let’s explore that option. Typically it costs somewhere between 2-6% of your mortgage price to refinance your mortgage. Assuming somewhere in the middle, that would be $10,000 for a $240,000 home. If you are trying to build long-term wealth, we can calculate the impact of this choice. If you were to take $10,000 and invest in a standard market index making 7% interest, you would end up with roughly $76,000 after 30 years. Contrast this to the scenario where you decided to refinance and save yourself $2 per month that you invested monthly in the same index fund. You would only have roughly $3,300 after 30 years.
The scenario above also assumes that you had $10,000 you could put down to refinance. If you don’t have that much money lying around, lenders will often offer you no-cost refinance options. You can either add that $10,000 to your loan amount or you can increase your rate to cover the cost. Doing the latter basically negates the whole reason to refinance in the first place, and the second option would result in a $275,000 mortgage at 6.557% which would put your monthly mortgage payment at $1,749. That is $62 more per month than your original loan.
So after exploring all the options, I think the answer is that it doesn’t matter if you buy now or later. This is strictly from a financial perspective and there may be other options to consider. With lower rates there would be more houses available which would give buyers more options to explore. If you are currently shopping for a home and are not finding any houses that meet your needs, you may benefit from waiting. Just know that there will likely be increased competition from the increase in buyers.
