Mortgage Rates Are Falling, Is Now a Good Time to Buy a Home?

Mortgage rates have already started to fall from recent highs, largely because of 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 ago, the lowest mortgage rate in 15 months, according to Freddie Mac.

“Potential home buyers are likely going to get a much more attractive rate today than they did just a few months ago,” said Jacob Channel, senior economic analyst at LendingTree.

Yet many homebuyers are anchored to the fact that mortgage rates hit their lowest levels just a few years ago after the Fed cut its benchmark interest rate to near zero, according to Dottie Herman, vice president at Douglas Elliman.

“I’ve been in the business for 30 years and I’ve never seen 2.5 to 3% in my entire life, except during the pandemic. I’ve never seen those rates unless it was a government loan.”

This “relativity bias” can stand in the way of opportunities, she added. “I bought a house when the mortgage rate was 15% and then refinanced my loan.”

For anyone considering buying now and refinancing later, it’s important to understand the benefits and risks, as well as what type of mortgage to get.

For starters, unless a buyer has the cash to pay for a home outright, most buyers must finance the purchase of a home.

“Any time you take out a loan, you need to be aware of the positives and the potential risks you may be taking,” said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.

A no-down payment mortgage, also known as a no-money-down loan, allows you to finance 100% of the cost of the home. This type of loan can be attractive because you can afford to own a home without a down payment.

But you might want to think twice before accepting such an offer, experts say.

Banks and lenders essentially offer two loans to cover the purchase of a home, Cohn said.

The first mortgage covers about 97 percent of the cost while the second mortgage covers the additional 3 percent, she explained.

And those loans often become due if the home is sold or the mortgage is refinanced at some point in the future, added Keith Gumbinger, a mortgage expert and vice president of HSH.com.

Another type of loan that may be attractive is the “buy now, refinance later for free” type. However, according to Cohn, you never really escape closing costs.

“You end up paying a higher rate because you’re essentially financing your own closing costs,” Cohn said.

In other words, there is no free lunch.

“No bank will ever give you a true no-closing-cost loan at the lowest possible rate. It just doesn’t exist,” Cohn said.

And buying with the intent to refinance always means taking a risk on mortgage rates, which carries a certain degree of risk.

“If you can afford a home, based on interest rates and purchase price, buy now,” said Michael Krowe, director of financial planning at Edelman Financial Engines.

Although the recent decline in mortgage rates could accelerate as the Fed cuts its benchmark rate, Lower mortgage rates could also boost demand for home purchases, pushing up prices.

“It may not make sense to delay the purchase if you can afford it today,” Krowe said.

What exactly will happen in the housing market “remains uncertain” and depends on how much mortgage rates decline in the second half of the year and the level of supply, according to LendingTree’s channel.

“It is almost impossible to predict how the market will evolve,” he said.

Homebuyers who are ready to buy a home may be eligible for a later refinance, but there are no guarantees. Waiting for a better rate also comes with the risk 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, buy it,” she said.

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