The job of a Realtor is part advisor and part matchmaker, and ideally is never part salesperson. In a perfect world this means always giving useful counsel to our buyers and sellers without resorting to sales pitches. With the rapid rise in interest rates and daily changes to affordability, it has been a challenge to provide valuable, realistic, forward-looking advice to buyers, who are well aware of the headwinds they’re facing.
The desire to simplify complex situations leads to pithy sayings like the one in the headline, which has the same meaning as another one that gets thrown around a lot these days: “you can always refi!” These are comments intended to soften the blow of a high mortgage payment by assuring a better rate down the line, and while yes it’s possible that you will be able to refinance later, I think it’s careless to promise it.
The percentage rate on a 30-year conventional mortgage is, right at this moment, going to have a seven in front of it. That’ll go up or down tomorrow and the next day and the day after that, which is the nature of mortgage rates. Historically, 7% is about an average rate. The sticker shock of it is a result of how quickly it rose from under 3%, where it was a year ago. It was the sub-3% rate that was ahistorical though, and once the Fed decided to stop subsidizing those mortgages the gravy train had to come into the station. I try not to make predictions, but I’m reasonably sure we’re not going to see anything like a sub-3% interest rate anytime soon, if ever again.
So let’s guess (yes, GUESS) that a 5-6% rate becomes the new normal once the Fed’s goal of tamping down inflation is achieved, or for whatever other reason rates go down (hint hint global recession). That would indeed be a good time to refinance out of your 7% loan. Reducing your rate by 1% would save over $300 a month on a $500,000 loan, which adds up to a lot of money even after the costs of a refi are factored in.
However! A couple of things have to happen to make this a reality. First, interest rates have to actually come down, and there’s no guarantee it will happen and no timeline for if it will. For all we know (and anyone who tells you they KNOW is lying to you, because if they knew they’d be a billionaire), they could continue to rise a point or two more and could then settle back at 7%, if they settle at all. Or, they do settle back at 5-6% but it takes five years. I’ll repeat: nobody knows!
Secondly, in most cases your house can’t be underwater on its mortgage if you want to refinance. In general, banks will want you to have at least 20% equity in the house in order to refi, which isn’t a huge hill to climb for most homeowners but could be a wrinkle going forward. Let’s say you put 10% down on the house you bought this year. You would need to wait for the combination of reducing principal via mortgage payments (and early on in a mortgage, the payments are more interest than principal) and market appreciation to get that other 10% of equity you need on top of what you already put in as a down payment. We’re in a market that, at the moment, is trending flat or slightly downward in home values, so the appreciation in value might take longer than you think. It’s not going to be like the last couple of years in which 10% appreciation could plausibly happen over the course of a long weekend.
In other words, things aren’t as simple as “marry the house, date the rate” or “you can always refi!” More accurately you can probably refi, but you shouldn’t count on it to justify a purchase.
Everyone is always wondering if it’s a good time to buy, and my advice remains the same as it would have been a month or a decade ago. If you need or want to make a change and it’s for the house that you plan to live in for a while- and you can afford it at today’s prices- it’s a good time to buy. There is less competition in the buyer pool and you can take your time making rational decisions, which was not the case until very recently.
My second piece of advice is to do your best to filter out the noise and stay focused on what you know because it’s your life, your circumstances, and your decision. The what-if brigade comes out in full force when major life decisions are being contemplated. They don’t know what the world will look like in twelve months and neither do I. Marry the house if you’re ready to get married, but you might still be dating that interest rate for a while.
