Should You Wait to Refinance or Buy a Home?

While interest rates are at historic lows, I've been asked many times over the last several weeks if I think they'll get any lower.  While I expect rates to stay low for the foreseeable future, I don't believe we'll see a significant decrease.

Might we see rates slightly below 3% for a 30-year fixed mortgage?  Maybe.  We're already locking VA and FHA home loans and 15-year conventional mortgages at 2.875%* or less. 

Anything is possible.  I didn't predict 6.4% of all mortgages in forbearance or 23 million Americans becoming unemployed in the last four weeks.  But I think you're taking a huge risk if you're waiting to buy or refinance to see if interest rates move lower.

First, I don't think investors have an appetite for 30-year terms at much less than 3%.  Remember, in normal non-pandemic circumstances, the market establishes interest rates - not individual banks and mortgage companies.  Imagine you're an investor in mortgage backed securities.  Do you want to tie up your money for 30 years at 2.5%?

Investors also don't expect consumers to keep the same mortgage for 30 years and they factor that into their investment decisions.  Do you know anyone who has had the same home loan for 30 years?  Consumers refinance to lower their terms, take cash out, or reduce their interest rates.  Or people move, sell their homes, and payoff the loan.

But who is going to pay off a loan with an interest rate below 3%?  Consumers aren't going to refinance.  Unless we have another pandemic, it's not likely we'll see rates this low again.  Homeowners might even think twice about selling their home.  Why not keep the house when they move and use it as a rental?  Investors don't want to risk having their money tied up long term at uber low interest rates.

In addition, interest rates don't follow linear trends.  In other words, a graph of mortgage interest rates looks more like a roller coaster than a mountain.  Timing any transaction to lock-in the absolute lowest interest rate in any given time period is nearly impossible.  Interest rates are constantly moving up and down.  Furthermore, you don't know when interest rates are at their lowest point until they increase from that point.

And, as I've mentioned before, you never know what can happen.  People lose their jobs after pandemic viruses cause the world's economy to come to a screeching halt.  Credit card companies lose your check and report a late payment to the credit bureau, killing your credit score.  If we've learned anything from this pandemic, it's to expect the unexpected.  If you have the ability to purchase a home or refinance and it makes financial sense to do so, do it now.

Potential buyers may believe home prices will decline.  I haven't seen any reputable source predicting a significant decline in values.  Fannie Mae's April Housing Forecast predicts an increase in the median price of a home (nationally) from $265,000 in the first quarter of 2020 to $283,000 in the second quarter.  Fannie then belives prices will decrease back to the starting point of $265,000 in the first quarter of 2021 before rising again.

The experts at Freddie Mac believe home prices will decline a modest 0.5% over the next year.

Interestingly, Fannie Mae also predicts interest rates of 2.9% beginning in the third quarter of 2021 (coinciding with an increase in home prices).  Freddie believes interest rates will bottom out at 3.1% which isn't far from Freddie's currently reported weekly average of 3.33%.

That's not enough for me to advise consumers to wait.

We are dealing with a severe housing shortage.  The supply and demand imbalance favors higher prices.  There will also be pent-up demand after we emerge from isolation.  Those who are currently unemployed or quarantined at home will eventually begin shopping for homes again.

In my opinion, it's not worth the risk.  I've been doing this a long time.  If I had a dime for every customer who decided it was better to wait, I'd be a very wealthy woman.  You know what happens nearly every single time?  People wait too long and they get priced out of the market.

Don't let the current opportunity pass you by because you are waiting on a (slightly) better opportunity that may never arrive.

* FHA 30-year fixed at 2.875% / 3.177% APR:  rate term refinance - $255,600 base loan amount - $280,000 value - 660 credit score - owner occupied - single family residence - $1,079 principal & interest

* Conventional 15-year fixed at 2.75% / 3.030% APR:  rate term refinance - $280,000 loan amount - $473,400 value - 794 credit score - owner occupied - single family residence - $1,900 principal & interest