Mortgage rates have doubled since the beginning of the year. This has significantly increased the cost of buying a home and will probably result in a slower housing market. That is exactly what the Federal Reserve wants because a slower housing market will help cool down inflation. How should you react if you need to buy a home? Bradly Harding, Vice President of Residential Mortgages at Home State Bank has some answers.
First of all, you may be tempted to pay points to lower your interest rate but Bradly advises against this. He points out that mortgage giant Fannie Mae (FNMA) predicts that 30-year mortgage rates are going to cool significantly, averaging 4.5% and The Mortgage Bankers Association sees mortgage rates dropping to 4.8% by the end of 2023. So, there is a consensus that the current run up in mortgage rates will be short lived.
“People that purchased homes in 2022 will probably have a rate of 6%-8%,” he states, “Rates are currently in the mid 7’s and will probably reach at least 8%. These people, are going to want to refinance in 2023-2024. Even if FNMA misses the mark by a wide margin, and rates end 2023 at 5.50%, this is an excellent rate and people will want to grab it. As such, you don’t want to pre-pay interest by paying points if you are not going to end up keeping the mortgage.”
He suggests further, “Our bank portfolio product 5/6 ARM (5 years fixed) is currently 1.5% below the 30-year fixed @ 6.00%. If you believe that you will refinance into a lower fixed rate within the next couple of years, why not take advantage of this rate being 1.5% below a 30-year fixed?”
The bottom line? Don’t give up on your dream of home ownership. There are many mortgage options available. Bradly concludes, “Don’t try to time the purchase of a home with the timing of fallen interest rates. Sure a few people could get lucky, but the vast majority of people will miss the mark. When you think that rates are at their low point, home prices have probably already risen. If you find a home that you like, and at the price that you want it, you should purchase it. You can always refinance later when rates become more attractive.”