Should You Wait For Rates To Drop Before You Buy?

Auto-generated captions cleaned for readability. Sponsor messages, commercial breaks, and repeated housekeeping have been trimmed; licensing information appears at the bottom of this page. Listeners who asked questions in the live chat are identified by first name only.

The question everybody is asking

Hello and welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I'm the Mortgage Mom, and every week on Wednesday I bring you this show live. It's an interactive show — if you're watching on YouTube, Facebook, or Twitch, put your questions into the feed and I'll read them out loud and answer them.

The big question on everybody's mind right now is the market: what's going to happen in 2023, what should we be expecting? I'm getting these questions just about daily. What do I think is going to happen with interest rates, and what do I think is going to happen with home prices?

Before I get to that, I want to be clear about what this is. These are all best guesses that experts in the field give you based on what they've been through, what they've seen in previous markets, and what they feel is coming. I don't have a crystal ball and nobody else does either. So what follows is what I think, based on my personal experience over all the years I've been doing this, and I want to make sure you hear that.

“Should I wait? I heard rates are going back to 5%”

The very first question I get, just about daily at this point, is whether people should wait to buy. And it's not a question about property values — they're asking whether to buy now or wait, because they heard interest rates are going to go down in 2023. They heard rates will be five percent again. Should they wait?

My opinion — and I could be completely wrong — is that we are not going to see rates come back down to five percent in 2023. I'm in this day to day. I get text messages once an hour so I'm on top of mortgage-backed securities and what's happening with the market, whether we're up or down. That's what I do for a living; it's not what a normal consumer is doing.

The Federal Reserve meets again next week. Over the last six, seven, maybe eight Fed meetings, they've increased the Fed rate every single time. And although it isn't directly correlated to mortgages, we have seen interest rates go up alongside.

The most recent articles I've been reading say that yes, inflation is finally starting to get a little better. A lot of people take that wrong and think we're fixed. We're not fixed. For the first time, the last inflation report said we didn't get worse and actually dropped slightly. The Federal Reserve's goal is to bring inflation down to two percent, and we're nowhere near two percent. But the increases they've done so far are starting to curb it. It's starting to work.

So they've talked about continuing to raise rates through 2023. Earlier this year the prediction was that they'd raise through 2022 and then stop in the first quarter of 2023. The most recent reports I've read say we don't know if they'll actually stop — we think they'll slow it down. What everybody anticipates for next week's meeting is an increase of another half a percent, instead of the three-quarter-point hikes they've done these last few times. Then in February they'll decide whether to do it again, and by how much.

So think about it this way. Even in a best case — only half a percent next week, only a quarter in February, nothing in April — we're still increasing, and then they hold. Once they decide they've increased enough, whether that's April or June or August, they hold it steady. If the Fed rate keeps going up, how would our mortgage rates come down?

Why mortgage rates are not tied to the Fed

Is it possible? A hundred percent — and again, I don't have a crystal ball. Because mortgages are not directly tied to the Fed rate.

Credit cards, short-term loans, home equity lines of credit, student loans — shorter-term financing is directly connected to the Fed rate. When it goes up, the rate on any adjustable financing tied to it goes up too, and you get a bigger minimum payment and pay more in monthly interest.

Mortgages are not tied to that. Mortgages are tied to mortgage-backed securities, and mortgage-backed securities are run by the bond market. So there is no direct correlation. If you look at a pattern, the pattern has been that as the Fed has raised the rate, our mortgage rates have gone up. But that is a pattern, not a wire.

So my best guess, my opinion, my judgment as the Mortgage Mom — not a financial advisor, not somebody telling you to act on my advice — is that we're going to see rates continue to climb a bit. I don't see them coming down to five percent in 2023. I would love to see that. It would be very helpful to my business, very helpful to my buyers, very helpful to sellers.

Here's the thing, though. I don't think you should be deciding whether to buy a home based on whether rates might drop. That should not be the determining factor. The interest rate can be refinanced if rates do drop down the road.

What you should be thinking about is: what do I feel is going to happen with value? How much am I putting down? Is the monthly payment affordable for me? Can I make this payment at today's rates? Is this something I can sustain? Is this a purchase I'm prepared to hold — whether I live in it or not — for at least five years? Am I being asked to move out of the rental I'm in? Are rents so expensive that I could buy for almost the same payment, or even the same payment? Is it more costly for me to rent because I have no tax deduction? There are a lot of reasons people need to buy right now, and what happens to interest rates next year is not really one of the factors I'd be weighing.

Q&A: advice for a new loan officer

Gustavo asks: “What's the biggest advice you'd give a new loan officer for 2023?” — and he mentions I funded his loan in 2021, which I do remember.

Number one: if you've never been a loan officer, this is probably the very best time to get into the business. This is the hard time. This is when it's rough. This is not when loans just fall in your lap, not when every aunt, brother, sister, cousin, and grandma needs a mortgage — which makes it very easy to take applications, earn money, get used to that money, and then have it all dry up.

This is a market where you need to know what you're doing. You need to understand the market, be looking for your clients, market yourself correctly, get yourself out there, network with the realtors in your area. This is the time to build from the ground up: one a month, two a month, three a month. And then when the tide turns and there's a good refinance boom, you're going to be busier than ever and thankful you're in this business.

So: market yourself, understand the business, do your homework, read your guidelines, know what you're doing, and make sure you're working for somebody with a lot of knowledge and experience. And make sure every deal you do, you do right — because the last thing you want is to have only a couple of deals and have them go sour, and have that become your reputation.

Q&A: refinancing after you buy

Victoria asks: “How long do you have to wait to refinance after you buy?”

There's really no waiting period — it depends on the loan you got. A lot of people understand them as subprime loans, but they're actually called non-qualified mortgages. Something like a hard money loan, a stated income loan, a no-income or no-ratio loan, or a bank statement loan — some of those alternative documentation loans can carry a prepayment penalty. So if you're not working with our team and you have a different loan officer, just confirm you don't have one.

As long as you don't, you're fine, because standard qualified mortgages — Fannie Mae, Freddie Mac, jumbo mortgages, FHA, VA — none of those products are legally allowed to have a prepayment penalty. That means you could get your mortgage and pay it off the next day with no penalty whatsoever. So there really is no waiting period. VA loans do have waiting periods based on circumstances, particularly if you're trying to take cash out — so if you're a vet, call us about your specific transaction.

There are things that will limit you, though. If you buy the home and the property has gone up in value, and you're trying to use the higher value — because it helps your rate, or moves you from a government FHA loan into a conventional, or removes mortgage insurance — guidelines say we can't use a new appraised value for six months from the date of purchase.

Q&A: closing costs on a refinance

Michelle asks: “I know refi closing costs are less than purchase closing costs. Besides origination fees, what closing costs are waived in a refinance?”

Refinance closing costs are less, but all the fees remain the same — some of them are just reduced. Depending on where you live, some states are escrow states, some are attorney states, some run everything through title, so your closing fees are the same line items. But several come down.

Title insurance: every time you get a brand new loan you need title insurance, but it's less expensive on a refinance, because the title company is essentially rewriting the policy already placed on the home rather than writing a brand new one.

Transfer taxes: in many counties and cities there are transfer taxes when you purchase a home. Those aren't going to happen again, because you already paid them, you're already the owner, and we're not transferring title to somebody else.

Your escrow fee — the closing agent's fee, whether you're in a title state or an escrow state — is usually much less expensive on a refinance than on a purchase.

But you're still going to pay an appraisal fee, the normal underwriting, and the credit report. Those types of fees are still paid. It is significantly reduced overall, but it's a reduction rather than a waiver.

Q&A: forbearance

Horace asks: “When one is experiencing a hardship, is forbearance good or bad?”

Forbearance is there for the people that need it. It's not good or bad. It does come with some repercussions — for example, once you're out of forbearance you have to get your payments made and made on time, and there's a certain number of payments that have to be made, which might hold you up from doing a future refinance. But it is not going to hurt your credit, and it is going to help you with a monthly payment you can't afford.

Forbearance was created for a reason and it's offered for a reason. If you're in a hardship, it is absolutely something you should reach out to your mortgage company about. There's nothing wrong with doing that. It saves your credit profile, it helps you get through whatever hard time you're going through, and it helps you get back on track.

Now, if your goal is to go on forbearance because you want to save up cash to do home improvements down the road, or to save money to pay off credit cards — that's probably not a good idea. Forbearance is there for the people who need it.

And once the forbearance is over, those payments don't just go away. It's not like you don't have to make them. There will be a balance. If you're on forbearance for three, six, or nine months, all those monthly payments total up and are owed. At the end you'll enter into a new agreement — many people call it a modification — with your mortgage company to get those payments taken care of. Sometimes they put it at the end of the loan. Sometimes they make it its own separate loan and place a lien against your property in the form of a second. Different banks do it in different ways. So if you don't need the forbearance, better not to get behind and have a balance you then have to figure out what to do with. But if you need it, that's what it's there for.

Q&A: reverse mortgages and mortgage life insurance

Michael asks: “Are reverse mortgages a good thing?”

Reverse mortgages are good for the right person. You have to be at least 62 years old to even get one. You can get a reverse mortgage as a purchase or a refinance, but it requires quite a bit of equity in the property — if you're purchasing, you'll have a pretty substantial down payment requirement; if you own the home and want to refinance into one, you have to have a substantial amount of equity.

It's fantastic for the person whose real estate is their asset for retirement — it's their retirement vehicle. Rather than selling the home, getting the cash, moving into something smaller, downsizing, and then living off what's left of that equity for the rest of their life, they can use the reverse mortgage to stay in their home. They don't make that move. They don't change their quality of life. And the reverse mortgage helps offset monthly payments and can get them cash in hand.

If you're somebody who still has a job, has a great pension, has a good retirement coming through the door, and the reverse mortgage isn't something you need — you're capable and happy to make payments, you don't need the cash out of your home to make ends meet, you don't owe anything on the home — then it would not be for you. You could keep that home free and clear, or continue to make the payment to pay the debt off, so that someday when you pass on, you're leaving that home to your heirs with a good amount of equity in it. The reverse mortgage is going to eat away at your equity — but that's really no different from selling the home, taking out the cash, and living on your cash. So it's right for the right person. I like the product quite a bit; it's just a specific program for a specific kind of person.

Michael also asks: “How does mortgage life insurance differ from homeowners insurance?” That's a great question and not one that's been asked before on this show.

Mortgage life insurance is a policy you can take out so that at the time you pass away, your mortgage gets paid off by that policy. It's an actual death benefit, like a life insurance policy. Homeowners insurance is your plan to protect your property — if somebody slips and falls, if a pipe breaks, if something catastrophic happens, if you have a fire and lose the home and all your possessions. It's very similar to a car insurance policy, but for your home.

What's actually happening in transactions right now

I promised you my 2023 forecast on values, so let me start with what I'm actually seeing come across my desk, working with real estate agents who have buyers trying to negotiate contracts and get offers accepted.

Because rates are elevated — higher than 2021, higher than 2020, even a bit higher than 2019, and I think higher than 2018 — what we've seen that's been very helpful is buyers' agents helping them negotiate a credit from the seller to buy the interest rate down. That keeps the home more affordable, and it keeps the purchase price up, which helps the market hold the price.

Think about it this way. When you look at comparables in a tract or a subdivision, and the last house sold for $400,000 — that was before rates went up. Everything went crazy in 2020, still pretty crazy in 2021, and it really wasn't until about the second quarter of this year, 2022, that we saw values plateau.

Now what we're seeing is sellers listing higher than the last sale — that's what the market had been doing, so that's what you think you're supposed to do. Then price reductions, bringing it back down to the most recent sale, which is where the home should be. And then they start offering concessions. So buyers are now getting something they haven't been able to obtain in many years: they're asking sellers for closing costs and getting anywhere from two to three percent of the sales price.

The majority of clients are using that money to buy the rate down — to make the rate, the home, and the monthly payment more affordable, and to bring the rate well below where the market is. That means they don't necessarily have to refinance until rates come way down, instead of refinancing right away and then having to do it again and again as rates keep dropping. It gives them a head start.

But look at what it does to the comparables. That house sold for $400,000 in early 2022, and the most recent sale is also $400,000, so the market looks steady. In reality the buyer got a $12,000 closing cost credit — so the seller netted $388,000, not $400,000. The market has dropped in that regard. Values are coming down. I'm not going to lie to you, and I'm not going to put on a pretty face to avoid scaring people away from buying. That's not what I'm here for.

As rates stay higher it's less affordable, so there are fewer buyers, which means more sellers than buyers. Before, we had more buyers than sellers. It's becoming a buyer's market, which gives the buyer the advantage and the edge to negotiate those credits and get the rate down. So we've probably seen about a ten percent correction in value — maybe not on paper, but because of the concessions buyers are getting on the deals we're closing.

The 2023 forecast

Here's where I think 2023 goes. I think we see a little more correction — sellers reducing prices a bit further and also providing concessions. And I believe that by the end of 2023 we see this market turn around: rates coming down, and a frenzy of people wanting to buy again.

So does that mean you should wait for values to drop? No. I think you need to buy a home, and I would not wait — I'd do it as soon as you're ready. Even if values drop a little from where you buy, if the home is affordable, you're getting your tax deductions, and you're planning on the five-year hold, then it doesn't matter, because it's going to go right back up.

And if you were somebody trying to buy between 2020 and 2021 — or you have a friend or family member who was — talk to them about that experience. Once it's back to a seller's market, the concessions to help with closing costs are gone. So are the appraisal contingencies, the loan contingencies, and the ability to not pay over value for the home. All the things we saw when the frenzy was going, you are not dealing with right now. Get the right price, make a good offer, work with the right agent, offer what the home is worth, get the concessions you need — do it while things are not absolutely crazy. And when rates come down, if they come down even lower than what we can buy the rate down to out of the gate, then we consider a refinance.

My prediction, my opinion, my gut — not a financial advisor: I believe by the end of 2023 or the beginning of 2024, rates start to come back down, property values start to go back up, and more buyers jump in. We start to see multiple offers and overbidding, and it becomes much harder to get an offer accepted.

So to sum up my forecast: rates higher than where they are today, starting to come down at the end of 2023 or the beginning of 2024. Probably another ten percent decline in property values by the end of 2023. And by the beginning of 2024, a lot more people jumping into the market, more multiple offers, and more overbidding. We might never get back to the crazy market we had in 2020 and 2021 — but the longer people sit on the shelf waiting, the more opportunity you have to negotiate a great deal.

The most important thing to remember, though, is budget. Make sure you're signing up for what you can afford and can continue to afford. Not “I can afford this now, but Debbie said rates were probably going to come down, so once I refinance I'll be fine.” No. Are you comfortable today? Because if you're comfortable with that payment today, then now is the time to buy.

And here's the other side of waiting. There are people who made multiple offers on multiple properties through 2020 and 2021, over and over again, and they're still sitting in my pre-approval bucket. They're still out looking for homes. They never got an offer accepted, and then rates went up, and now they've been priced out of the market.

Wrap-up

So if you can afford it today with where rates are today — and I want you to hear that condition, if you can afford it — then it is a very good time to buy, and you should be giving us a call.

Call the office at 844-935-3634, that's 844-WE-LEND-4. Or head over to mortgagemomradio.com, where you can download the tools app to run payments and use the calculators. We don't charge consultation fees. We'll talk to you for an hour and help you work out what you need to do to get on the right track, whether that's a refinance, a purchase, or just a plan for a year from now. And we'll be honest with you — I'm not going to tell you I can do something I can't, and nobody on my team will either. If there's a problem, we'll tell you right out of the gate and talk about how to get you into the next one.

I want you back on again next Wednesday, right about one o'clock. To know when we've gone live, text the word MOM to 844-935-3634 — one text a week, no spam, with a link you can click to join. I hope you all have a great rest of your week. We'll see you real soon.