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Mortgage rates fall
Mortgage rates have already started to fall from their recent highs, largely due to the prospect of a Federal Reserve-induced economic slowdown. The average rate on a 30-year fixed-rate mortgage fell to 6.35% on Aug. 29 from 6.46% a week earlier, the lowest mortgage rate in 15 months, according to Freddie Mac.
“Today’s potential homebuyers are likely to get a more attractive price than they did just a few months ago,” said Jacob Channell, senior economist at LendingTree.
However, many home buyers are still clinging to the fact that mortgage rates hit record lows just a few years ago after the Federal Reserve cut its benchmark interest rate to near zero, according to Dottie Herman, a vice president at Douglas Elliman.
“I've been in this business for 30 years and I've never seen a 2.5% to 3% rate in my entire life, except during the pandemic – I've never seen those rates unless it's a government loan.”
Such “relative bias” can be a barrier to opportunity, she added. “I bought a house when it was 15% and then refinanced it.”
Financing is key
For anyone considering buying now and refinancing later, it's important to understand the rewards and risks, as well as what type of mortgage to get.
First of all, unless the buyer has enough money to pay for the home in full, most home buyers need to finance the purchase of a home.
“Every time you take out a loan, you have to be aware of the positives as well as the potential risks that you may be taking with it,” said Melissa Cohn, regional vice president of William Ravis Mortgage in New York.
A no-down mortgage, also known as a zero-down mortgage, allows you to finance 100% of the cost of a home. These loans can be attractive because you can essentially enter into home ownership without a down payment.
But it might be a good idea to think twice before accepting such an offer, experts say.
Banks and lenders essentially offer two loans to cover the purchase of a home, Cohen said.
She explained that the first mortgage covers about 97% of the cost, while the second loan completes the additional 3%.
These loans often become due 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 may be tempting is a “buy now, refinance later” mortgage. However, according to Cohen, you’ll never escape the closing costs.
“You end up paying a higher price because you're essentially financing your closing costs,” Cohen said.
In other words, there is no such thing as a free lunch.
“No bank will ever give you a real loan with no closing costs at the lowest possible rate. That doesn’t exist,” Cohen said.
Buying to refinance is always a risk with mortgage rates, which carries a certain amount of risk.
Is this the right time to buy a home?
“If you can afford a home, based on interest rates and the purchase price, buy now,” said Michael Crow, director of financial planning at Edelman Financial Engines.
Although recent declines in mortgage rates may gain momentum as the Federal Reserve cuts its benchmark interest rate, lower mortgage rates could also boost demand for homes, which could push prices higher.
“It probably doesn't make sense to delay the purchase if you can afford it today,” Croy said.
Exactly what will happen in the housing market “remains unclear” depending on how low mortgage rates are in the second half of the year and the level of supply, according to LendingTree.
“Timing the market is practically impossible,” he said.
Home seekers who are ready to buy a home may benefit from refinancing later, but there are no guarantees. And waiting for a better rate comes with the possibility of having to pay a higher purchase price.
Ultimately, “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,” she said.
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