I am interested in buying a home as soon as possible, but I'm concerned about the high interest rates - 6.7% as of October 2022. Someone told me to just buy a new home now, accept a high mortgage, and re-finance later when rates are lower. Is this a good strategy? Assuming that interest rates start falling within the next 2-4 years, and the bank allows for re-financing, I could own a new home today and still be saving in the long-run. What should I be concerned about with this expectation? Perhaps the rates will not drop within the next couple years, or something else.
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22Yes, you should be concerned that interest rates will not go back down. You should only do this if you are willing keep the current interest rate.– minouSep 30, 2022 at 12:57
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34Keep in mind that today's "high" rates were the "low" rates just 15 years ago. Given that there's more room for rates to go up than down, I wouldn't let the rate alone make your decision for you. (Consider, though, that if you wait and rates go up, today's "high" rate could end up being the target rate you are waiting for to refinance to in 5 years.) Put more weight into your reasons for buying a home and how long you plan on staying there.– chepnerSep 30, 2022 at 13:08
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3For mortgage rates, I'm willing to say "yes". That article is about a very different lending market.– chepnerOct 1, 2022 at 15:35
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5"and the bank allows for re-financing" - I'm pretty sure the bank doesn't get a choice if you don't want it to. Many times when you refinance you literally pay off the original mortgage, with money borrowed via the new one. The first bank can't refuse the payoff. The most they can do is refuse to refinance themselves, but you can always go elsewhere.– whatsisnameOct 2, 2022 at 4:53
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5@whatsisname: Some banks (at least where I live) charge a penalty for an early payoff - so they can't refuse they refinance, but they can make it economically not worthwhile to do it.– psmearsOct 3, 2022 at 9:41
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4 Answers
You should not buy a house that you cannot afford given your current financial condition.
Buying a house that you can't afford now hoping that interest rates will go down is a huge risk. If you can afford the house at current rates, then by all means feel free to do it. If rates go down significantly (meaning more than enough to make up for the costs of refinancing) then that's just extra benefit for you.
Side note: banks almost always allow for refinancing - they make money off of the closing costs of the new loan. The only reasons they wouldn't is if you don't have enough equity (e.g. due to the property value dropping) to refinance; not because they don't want you to have a lower interest rate. They are not concerned about you paying less interest. In fact, they've likely already sold your loan to someone else and are just servicing the loan.
If rates go up, then you're locked in at current rates and it does not impact you.
If you cannot afford the house you're looking at but still want to lock in current rates, then just buy a cheaper house. If rates go down and you can now afford the other house (or a similar one) then you can move at that point.
Bottom line - I wouldn't be too concerned about the current "high" interest rates. Rates were higher for several years before 2008, and the trend would indicate that they are more likely to go up than down (this is not a prediction or a suggestion, just an opinion). Never rush into any major purchase out of fear.
answered Sep 30, 2022 at 13:48
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1"In fact, [banks] likely already sold your loan to someone else and are just servicing the loan." That's a rather odd statement. To whom did "banks" sell the loan? Whoever holds the mortgage most certainly does care if you refinance. Oct 1, 2022 at 5:05
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10@Acccumulation: Whoever holds the mortgage has no standing to tell someone else not to offer you a new loan on the remaining balance, and in most cases, they cannot refuse to let you pay off the loan early (which is what refinancing is - paying it off with a new loan possibly from a different party) or impose fees on you for paying it off early. Oct 1, 2022 at 14:22
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6@Acccumulation many (most?) mortgages will be sold by the mortgage originator (the bank) soon after they are created, for a variety of reasons, a large one being that it allows them to free up capital to provide more loans. This is a very normal process, and doesn't have to involve MBS (although it often does)– BeB00Oct 1, 2022 at 20:13
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1@Nelson My point is that when "banks" sell mortgages, they sell them to ... banks. So it's rather odd to say that "banks" don't care if you refinance, because "banks" have sold them. If D Stanley wants to say that originating banks don't care, then it's rather obfuscatory to just say "banks". Oct 3, 2022 at 4:30
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1@R..GitHubSTOPHELPINGICE Yes, but this answer doesn't merely say that "banks" can't stop you, it says that they don't care. The banks that hold the mortgages absolutely do care. Oct 3, 2022 at 4:31
Is this a good strategy? Assuming that interest rates start falling within the next 2-4 years, and the bank allows for re-financing, I could own a new home today and still be saving in the long-run. What should I be concerned about with this expectation? Perhaps the rates will not drop within the next couple years, or something else.
You are concerned about guessing when rates will go down. As you stated in your question that is a risk, because they might not go down for years.
Another gamble is that you are buying at the top of the market. If the home prices drop, then refinancing becomes problematic. Lenders don't like to make loans close to the value of the property. If the value drops you may need to add cash to be able to get a new loan. People who bought at the top of the market in 2006 found they couldn't refinance without bringing cash to the table.
Don't do the deal unless you can afford the monthly payment at your current income level and the current rates. Getting something that isn't affordable on the hope it becomes more affordable in a year or two increases your risks.
answered Sep 30, 2022 at 13:59
This is a very risky approach. If the bank offers you a fixed term mortgage for say 3 years and one for 10 years with the same interest rate of 6.7% that means the bank believes that typical interest rates for the next 10 years will be around 6.7%. The bank has a whole bunch of professionals whose job it is to make these kind of estimates. Taking a long term fixed mortgage means outsourcing the risk of fluctuating interest rates to the bank.
Of course they still can be wrong but in order for this to be profitable for you, your prediction of future interest rates needs to be better than that of people whose job it is to make such predictions.
You can gamble for lower interest rates in a few years and potentially save some money if you win but also consider what happens if interest rates do not fall. Do you have to sell the house you just bought? That is almost certainly bad for you financially and presumably emotionally as well.
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2I'm a little puzzled by your 3-year and 10-year terms. At least in the US, which this question seems to be addressing, mortgages aren't generally sold in those terms. Oct 1, 2022 at 3:41
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1"that means the bank believes that typical interest rates for the next 10 years will be around 6.7%" I don't think this is true, I think it means that over the term that (some|most|many) of the banks customers will hold onto their loan is %6.7. (Some|Most|Many) of people that get a mortgage do not hold onto it for the full term of the loan especially with real estate investing seeming to be ever popular.– SamOct 1, 2022 at 13:07
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3Most mortgages in the US are 30-year fixed rate mortgages. A fixed rate mortgage for a short term followed by renegotiation for the remaining term would be extremely unusual. In fact, I've never heard of a mortgage like that. Oct 1, 2022 at 15:13
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1This answer seems to be saying that mortgage rates now are based on an estimate of what mortgage rates will be in the future, but that characterization denies any underlying basis. On the contrary, mortgage rates are largely driven by market forces. Good old supply and demand determines the price of money. Oct 2, 2022 at 5:30
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1@CareyGregory (in the UK) those aren't the length of the mortgage, but the length of the fixed rate period, after which the interest rate will change. Typically there are repayment penalties during the fixed rate period. And fixed rates max out at 10 year periods (I've just fixed for 2, but wish I'd gone for 3 at the same rate)– Chris HOct 3, 2022 at 15:16
Previous answers here have addressed the issue that rates may not fall for a while. If you really want to own a home and can do so in the current rate and price environment, then go ahead with the purchase.
If you do not mind tying up capital for a long time and only want to speculate on interest rates dropping in the future, you can take on significantly lower risk by buying 10-yr US Treasuries. If rates fall, the market value of the bonds will go up and you will make money. If rates do not fall, you will have some bonds which pay 3.7% coupons. If they go up, you will still have some bonds which pay 3.7% coupons, but if you need to liquidate prior to maturity, you may have to do so at a loss.
A lot of people are attempting to forecast the "terminal rate", aka the highest that the fed-fund rate will go. The current consensus is around 4.6% but there are higher and lower predictions from Wall Street analysts. https://www.bloomberg.com/news/articles/2022-09-16/fed-seen-raising-to-4-in-2022-and-signaling-higher-for-longer
Obviously nobody can accurately predict exactly what the Federal Reserve will do with 100% certainty.
If you're curious about this and not already familiar, read up on bond duration. https://www.investopedia.com/terms/d/duration.asp
