If you’re in the market for a home but are discouraged by the current high mortgage rates, you’ve probably heard the advice “buy now and refinance later”—maybe from your mortgage lender, real estate agent, or a well-meaning friend.
This seemingly simple solution might empower you to stretch your budget now, with the plan to refinance when mortgage rates drop.
But is “buy now, refinance later” the win-win it’s cracked up to be?
Let’s take a look at this homebuying strategy from all angles and explore the ways in which it could help—or hurt—buyers down the line.
Mortgage rates on the rise
Mortgage rates have been climbing amid stubborn inflation, with a 30-year fixed-rate mortgage currently averaging 6.73%, according to recent numbers released by Freddie Mac. Just a year ago, the 30-year fixed-rate was 3.85%.
And where mortgage rates will go next is anyone’s guess.
“Predicting mortgage rates in the coming months can be challenging, especially considering the current economic climate and various factors affecting the market,” says Joy Aumann, a licensed real estate agent and founder of Luxury SoCal Realty in San Diego. “While some experts believe that rates may remain relatively stable or even decrease slightly, others argue that inflationary pressures and monetary policies could push rates higher.”
What does ‘buy now, refinance later’ actually mean?
“Marry the home, date the rate”—we’ve heard this homebuying approach phrased a number of ways, but the goal is to offer buyers the promise of a better, more financially viable tomorrow.
The idea is that buyers who take out a loan now with a company can refinance in the future when rates drop.
Don Chambers, a Georgia-based real estate investor, says some mortgage lenders are even offering buyers a promotion of “one free refinance” (during the life of their loan) once rates have dropped. This would mean the buyer wouldn’t have to pay refinancing fees and other costs. For example, closing costs for a refinance are typically 2% to 5% of the loan principal amount.
The goal, Chambers says, is to get buyers the home they want now, with the hope that their monthly payments will ease up when rates drop.
How much do mortgage rates have to drop?
Nobody has the ability to predict if and when rates will drop. But for a “buy now, refinance later” strategy to make financial sense, rates would need to drop by a certain amount. For some buyers, rates might never go low enough for a refinance to actually save them money.
Typically, a 1% rate drop is enough to warrant a refinance.
But Troy Shaffer, founder of Blu Corporate Housing in Phoenix, points out that a drop of 2% might be needed to truly make a dent in monthly payments.
Ultimately, it all depends on your individual loan scenario.
“On a $100,000 loan, rates are going to have to drop a lot more than on a $1 million loan to make refinancing a viable option,” says Jennifer Beeston, a senior vice president of lending at Guaranteed Rate Mortgage. “The type of loan you are doing may be easy to refinance or not even possible without an equity gain.”
Loans made for military veterans, for example, are the easiest to refinance. This is because they do not require an appraisal, which can garner additional fees, Beeston says.
“A 3% down conventional loan is a different story, because to refinance you are either going to need the house to go up in value or have cash to do the refinance and meet loan-to-value guidelines,” she explains. “The same goes for low-down-payment jumbo loan options. This is why it is imperative to discuss the future with your lender, if you are hoping to refinance.”
Consider refinancing fees and closing costs
When considering a mortgage refinance, you also have to factor the additional fees associated with refinancing. Closing costs, for example, include the appraisal fee, title services, and attorney fee. As mentioned above, buyers can expect to pay 2% to 5% of the loan principal amount in closing costs.
So even if mortgage rates do actually drop 1% to 2%, crunch the numbers and decide if refinancing would even save you enough money to make it worthwhile.
History shows us that buying more house than you can afford is a terrible idea. So if you can only swing a house purchase because you’re banking on refinancing in a few years, take a step back.
“You shouldn’t buy the house if a refi is essential,” Chambers says. “It’s possible that there will be no rate decrease over the life of the loan.”
Today’s buyers should monitor mortgage rates and consult with a mortgage broker to make an informed decision on the loan that’s right for them.
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