Should I Buy a House Now or Wait for Mortgage Rates to Go Down?
Have you watched the news lately, scrolled through TikTok, or looked at Twitter (or is it “X” now?) lately? Or maybe spent time around that one friend who’s a self-proclaimed real estate expert? If you have, then chances are you’ve heard mortgage interest rates are pretty high these days.
TikTok and your friend are right: Interest rates are higher than they’ve been in quite a while. From January 2022 to October 2023, the average rate for a 15-year fixed-rate mortgage jumped from around 2.3% all the way to over 6.5%.1 That’s a big leap!
If you’ve been thinking about buying a house or working to save up a down payment, the spike in mortgage rates has probably left you with an important question: Should I buy a house now, or wait for mortgage rates to go back down?
To answer that question—and so you can make the best decision for you and your family—let’s dive into the numbers (no scary math, we promise) and see whether now is a good time for you to buy, or whether you should punt that decision down the road.
Should I Buy a House Now or Wait?
Yes, you should buy a house now if you’re financially ready to do so. Mortgage interest rates are high right now, but we don’t know for sure whether they’ll go back down anytime soon—they may even keep going up if the Federal Reserve (also known as the Fed) decides to raise the federal funds rate again (more on that later).
We do know, though, that housing prices will keep going up (like they always have). So, your best bet is to buy now and lock in your home’s price before housing costs increase even more. Then, if interest rates do go down in a year or two, you can refinance to a lower rate.
Plus, because interest rates are high right now, fewer folks are buying—that means you won’t have as much competition when you make offers.
Here’s the deal, though: You should only buy a house if you’re prepared financially. How do you know if you’re financially ready to buy a house? Let’s break it down.
Am I Prepared Financially to Buy a House?
If you’ve checked these four boxes, you’re in the clear to buy a house!
- You’ve paid off your debt. Focus on paying off all your consumer debt before you buy a house. Getting rid of student loans, credit card payments and car notes will give you more margin in your budget—and that’s super important as a homeowner.
- You have a full emergency fund. Saving up an emergency fund of 3–6 months of your typical expenses before you buy will be the difference in whether a broken HVAC unit, fridge or washing machine is a catastrophe or merely an inconvenience.
- You’ve saved a strong down payment. If you’re a first-time home buyer, you need a down payment of at least 5–10%. But if you can swing a 20% down payment, that’s even better. Why? Putting 20% down will keep you from having to pay for private mortgage insurance (PMI), an extra monthly fee that could add hundreds to your house payment.
- You can afford the house payment. Don’t buy a house if the monthly payment (including principal, interest, homeowners insurance and HOA fees) on a 15-year fixed-rate mortgage would be more than 25% of your take-home pay. Any more than that, and you run the risk of not having enough money left in your budget each month to put toward other important financial goals—aka, you’ll be house poor.
If you haven’t checked one or more of those boxes, that’s where you need to direct your focus for now. We know how badly you want to be a homeowner and start building equity. But we talk to people every day who bought a house before taking those steps and wound up regretting it because they got stuck with a giant, expensive burden.
Will Mortgage Rates Go Down in 2024?
The answer to whether mortgage rates will go down in 2024 changes based on who you ask. That’s because it all depends on whether the Fed decides to continue raising interest rates, keep them steady, or begin bringing them down—and predicting the Fed’s moves has proven difficult.
But even if mortgage rates do go down in 2024, odds are the drop won’t be drastic—it’s not like rates are going to quickly return to the 2–3% range we saw at the end of 2021. The bottom’s not about to fall out here.
For example, even though the National Association of Realtors believes rates will go down in 2024, they’re only predicting a half-percent drop—from 6.5% to 6%—by the end of the year.2 A lower rate is definitely nice, but that small of a drop isn’t worth waiting around for. Let’s do some quick math to see why.
If you bought a $350,000 house with a 20% down payment and a 15-year fixed-rate mortgage at 6.5% interest, your monthly payment (principal + interest) would be $2,439. What happens if you adjusted the interest rate to 6%? Not much. Your monthly payment would decrease to $2,363—a difference of just $76.
Yeah, not exactly life-changing stuff.
How Do Federal Interest Rate Hikes Affect Mortgages for Home Buyers?
When interest rates go up in the real estate world, so do monthly payments and the total amount of interest you’ll pay on a mortgage. How much? Here’s an example.
Let’s say we have two couples who each bought $350,000 houses with 20% down and 15-year fixed-rate mortgages. Couple #1, Jim and Donna, bought their house in January 2022 when the typical interest rate was around 2.3%. Couple #2, Bob and Cheryl, bought their house less than two years later in October 2023—after the average rate rose to over 6.5%.3
We used our mortgage calculator to see what both couples will pay for their houses. To keep things simple, we left out costs for property taxes, homeowners insurance and homeowners association (HOA) fees.
Bob and Cheryl will pay over $100,000 more in interest than Jim and Donna—even though their home value and loan terms are the same. Plus, Bob and Cheryl’s house payment is nearly $600 more per month. Ouch!
What Is the Federal Reserve?
Okay, we’ve mentioned the Fed a couple of times and talked about how interest rate hikes can affect you. But what is the Fed anyway?
Well, the Federal Reserve is the U.S. central bank that creates money and sets interest rates. Its main goal is to keep the economy running smoothly by having low unemployment and low inflation.
The Fed is kind of like a mechanic who tinkers around with a car to make it purr like a kitten, and one of its favorite tools is (shocker) interest rates.
Why Is the Fed Raising Interest Rates?
The Fed raises interest rates to encourage people to borrow less, spend less and save more—which should slow down inflation.
Now, the Fed doesn’t tell commercial banks what interest rates to charge on loans, but they do influence the banks’ rates by setting their federal funds rate. The fed funds rate is the interest rate banks charge to each other for overnight loans, and it influences most other interest rates.
So, even though the Federal Reserve doesn’t actually set mortgage interest rates, its decisions can still affect your mortgage. For example, mortgage rates went up in early 2022—even before the Fed started raising rates. That’s because banks saw what was coming and started upping interest rates to protect their profits.
The Bottom Line
No one likes it when interest rates go up, but it’s not the end of the world. This is still a great time to buy a house—you’ll just pay more than you would’ve a few months ago. It’s also a good time to sell a house. And if you already have a fixed-rate mortgage locked in, you’re in good shape too.
While it’s smart to get the lowest possible interest rate on your mortgage, that doesn’t mean you have to wait years to buy or sell a house—or to refinance if your current loan just isn’t working for you. You get to decide when to buy a house based on what’s right for you and your family, not what the Fed is doing.
See more at…https://www.ramseysolutions.com/real-estate/how-fed-rates-affect-housing