Buying a house in today’s market might seem daunting with higher interest rates. However, purchasing at a higher rate now with plans to refinance later could be a good strategic move. This approach allows you to lock in the current price of the home and reduce your interest rate (and monthly payments) by refinancing in the future.
Interest rates and home prices often have an inverse relationship. When rates are low, buying power increases. More people can afford to borrow more money, which drives demand and pushes home prices up. When rates are high, fewer people can afford to borrow. If you are able to afford the higher monthly payment until rates drop, then you are in a good position to implement this strategy. By waiting for a lower interest rate, you might end up facing significantly higher home prices, which could offset the benefits of a lower rate.
If you buy now, even at a higher interest rate, refinancing when the rates drop will lower your monthly mortgage payment. This option allows you to take advantage of lower rates without needing to purchase a new home at potentially inflated prices. Refinancing involves adjusting your mortgage terms, reducing both the interest rate and the monthly payment.
Remember, you can change your mortgage rate, but you can’t change the price you paid for your home.
Check out this example of monthly payments when purchasing a $500,000 with $7000 in annual taxes.
| 7% | 6% | 5% |
| $3245/month | $2982/month | $2731/month |
Buying now at 7% and refinancing when rates drop to 5% would reduce your monthly mortgage payment by $514/month!
Holding off on buying a home in hopes of a drop in interest rates could mean missing out on today’s prices, which are only likely to climb as demand continues and inventory fluctuates. The longer you wait, the higher the potential cost, even if you secure a lower interest rate later. Plus, the opportunity to build equity in a property could be delayed, affecting your long-term financial situation.
In this same scenario, if you wait for rates to drop to 6% (by one percentage point), but competition from other buyers who were also waiting for rates to drop pushes the sales price up to $525,000 (or $550,000), then your monthly payment would like something like this:
| $525,000 | $550,000 |
| $3101/month | $3221/month |
As you can see, buying the same house at a lower interest rate, but for $25,000 more costs you $119 more per month. This does not include increased costs from transfer tax, title insurance, homeowner’s insurance or the costs and risks associated with possibly waiving inspections and/or an appraisal.
Waiting for rates to drop even more will just inflate your monthly payment further, assuming that the lower rates will continue to push up house price due to an increase in buyers and bidding wars.
If you have any questions or would like to discuss the real estate market, please call or email me today! If you would like to sell your home and/or buy a new home, please consider the services that I offer and read testimonials from past clients.