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Mortgage rates are expected to fall next year, but that doesn’t mean potential buyers should necessarily put off a purchase in anticipation of lower financing costs.
The rate on a 30-year fixed-rate mortgage will drop to 4.5% on average in 2023, according to a recent survey provide issued by Fannie Mae, a government-sponsored lender.
This dynamic would offer relief to potential buyers who have seen mortgage rates soar this year.
The Federal Reserve began raising its benchmark interest rate in March to tame stubbornly high inflation, leading to higher borrowing costs for consumers – who could feel a boost from 2020, when rates hit historic lows.
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Average rates are expected to be 4.7% and 4.4% in the first and fourth quarters of 2023, respectively, compared to 5.2% in the second quarter of this year, according to Fannie Mae.
Still, consumers should “take the forecast with a grain of salt,” according to Keith Gumbinger, vice president of HSH, a market research firm.
“If you participate in the market, interest rates are important but may not be the most important thing,” Gumbinger said.
Rates on a 30-year fixed mortgage – the interest rate of which does not change over the life of the loan – have jumped more than two percentage points since the start of 2022.
Rates averaged 5.55% the week of June 23, according to data from Freddie Mac, another government-sponsored entity. This is a significant increase from 3.22% in the first week of January, although a slight drop from the high of 5.81% in June.
Even a seemingly small increase in mortgage costs can have a big impact on consumers, through higher monthly payments, higher lifetime interest and a smaller overall loan.
Here’s an example, according to data from HSH: At a fixed rate of 3.5%, a homebuyer with a $300,000 mortgage would pay about $1,347 per month and $185,000 in total interest over 30 years. . At 5.5%, homeowners would pay $1,703 per month and pay over $313,000 in interest for the same loan amount.
Here’s another example, which assumes a buyer has an annual pre-tax income of $80,000 and pays a down payment of $30,000. This buyer would qualify for a $295,000 mortgage if rates were 3.5%, about $50,000 more than the same buyer at 5.5%, according to HSH data. This differential can put some houses out of reach.
Many consumers have shifted to a variable rate mortgage over fixed rate mortgages as borrowing costs have ballooned.
Adjustable-rate loans accounted for more than 12% of mortgage applications in June and July this year – the largest share since 2007 and double the percentage in January this year, according to Zillow Data.
These loans are riskier than fixed rate mortgages. Consumers typically pay a fixed rate for five or seven years, after which it resets; consumers may then owe higher monthly payments depending on market conditions.
Kevin Mahoney, a certified financial planner based in Washington, DC, favors fixed rate loans because of the certainty they provide consumers. Homebuyers with a fixed mortgage can potentially refinance and reduce their monthly payments when and if interest rates drop in the future.
More broadly, consumers should largely avoid using mortgage estimates like Fannie Mae’s as a guide for their buying decisions, he added. Circumstances and personal desires should be the primary driver of financial choices; moreover, such predictions can turn out to be extremely inaccurate, he said.
“You could be looking for better numbers for years in some cases if things don’t go your way,” said Mahoney, founder and CEO of millennial-focused financial planning firm Illumint.
But potential buyers can perhaps risk waiting if they don’t have a rigid timeframe for a purchase and have a cushion in their budget in case mortgage rates don’t move as expected, added Mahoney.
Consumers who find a home they love — and can afford to buy it — are likely best served by jumping on the opportunity now instead of delaying, Gumbinger said.
Even if borrowing costs improve next year, overall affordability is likely to remain a challenge if house prices remain high, for example, he added.