Last week brought good news for potential home buyers. The average rate for a 30-year fixed-mortgage was down to 6.04%, continuing a downward trend in interest rates that started back in November of last year.
Interest rates have come down a whole percentage point from 2022’s peak at 7.04%.
This is obviously good news for the real estate market, and with this good news I thought I’d spend a little time talking about interest rates, and how much news like this should influence your real estate decision making.
I’ve heard a lot of complaints over the better part of the last year about soaring interest rates – people shying away from the market due to rates climbing above 7%. I don’t blame buyers for being frustrated or hoping for some relief – especially my first time buyers trying to compete in an overcrowded market.
Still, if we step back and look at the big picture, we can see that our perspective has been skewed a little by the times. An unprecedented and devastating epidemic led to unprecedented measures by the Fed to protect the economy and stave off a recession, which led to extremely low interest rates for buyers. Also keep in mind that prior to COVID rates had remained historically low in the wake of an unprecedented collapse in the housing market over ten years ago.
I’m here to break the bad news to everyone. Those 2% and 3% interest rates are probably gone for good, and interest rates ranging from 5 to 7 percent are much more realistic.
Take a deep breath. Sigh if you must. If you only dipped your toes into the real estate market a couple years ago and are now trying to wade out and dive in, you’re certainly going to feel the pain of a nearly doubled interest rate.
But buyers just starting the preapproval process shouldn’t pay much attention to the interest rate increases. Stay focused. Don’t get distracted by the noise. A 6% interest rate on a 30-year mortgage, historically, isn’t all that high.
If you were buying a house back in 2000, you could expect a rate around 8%. Rates in the 80s soared to almost 20%!
Compared to historic averages, the rate released last week is right smack in the middle of the road.
I’d be remiss if I didn’t at least acknowledge the impact interest rates have on the home buying process. One percentage point up or down can change a client’s affordable range quite drastically.
According to CNN Business, Freddie Mac’s chief economist said that the one percentage point decrease from last year’s peak rate will allow as many as 3 million more “mortgage-ready consumers to qualify and afford a $400,000 loan, which is the median home price.”
That sounds like a big deal, and there’s no understating the impact such a change can have on the market, but remember that that percentage change spanned the course of a year, and the weekly averages fluctuate gradually.
This is why I tell my clients not to get too fixated on the average rate. It’s something to keep your eye on, sure. But if you’re entering the market to buy, you have to keep your eyes on the prize, which is finding your dream home.
One of the biggest reasons for looking past the mortgage rate is that you always have the option to refinance your mortgage. If you find the home of your dreams and your initial mortgage is affordable, take it!
If you’re unhappy with your rate, keep a pulse on the averages and refinance when the numbers are more favorable for you. You might even be able to cut off years of payments and still pay a similar monthly payment.
(A friendly reminder that you should never buy a home that’s out of your price range in hopes of refinancing into an affordable mortgage later down the road. Be sure that you can make the monthly payments when you buy your new home, else wise you risk missing payments and possibly losing your home to foreclosure).
The other reason I’m not as concerned about mortgage rates is that the real estate market is a solid investment. Every day that you own your house, you’re gaining equity, regardless of your interest rate. Historically, home values continue to rise and I don’t see any reason why they won’t continue to do so.
So, the more time spent sitting back and waiting for the perfect interest rate, the more expensive your dream home will be.
Real estate is a long-term investment, and waiting on the perfect interest rate is a short-term move. When you factor in the ever-recurring possibility of refinancing to a better interest rate, why would you hesitate to buy your dream home?
In searching for a new home and entering the real estate market, my clients have a lot of things to consider, and the interest rate on their mortgage can’t be dismissed. But it shouldn’t be a sole determining factor for anyone.
Even for those that are still hesitant, I invite you to explore your options and see what you can afford. If you find a house you’re interested in, have your trusted local lender run your numbers and give you an estimated monthly payment for the listed sale price.
If you find it affordable, take the opportunity to see the house and decide whether you want to put in an offer. In the end, if you love the house, and you can afford the monthly payments – 4%, 5%, 6% – who cares what the rate is? Why wouldn’t you buy your dream home now?
If you have any more questions about the real estate market and interest rates, feel free to message me! I’m always happy to help!