Locking in mortgage rates now might make more sense than waiting for the Fed to cut rates. Getty Images
The past few years have been tough for would-be homebuyers. As mortgage rates rose in tandem with the Federal Reserve's benchmark rate, many buyers sat on the sidelines, waiting for the right time to enter the market. And that decision might look even smarter when mortgage rates hit 8% in October 2023, the highest level in more than 20 years.
However, recent changes in the economic climate are beginning to change this calculation. Inflation is showing signs of subsiding, and mortgage rates are falling accordingly. This trend is driven primarily by expectations of future interest rate cuts by the Federal Reserve, which is currently expected to cut interest rates just once in 2024.
However, a Fed rate cut could be months away, and in any case, you probably won't need to wait until the Fed cuts to act. It may be wise to act now and lock in your mortgage rate right away.
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5 great reasons to lock in your mortgage rate now
Here are some reasons why locking in your mortgage rate now is a smart choice.
Mortgage rates hit four-month low
The average interest rate on a 30-year fixed mortgage is currently 6.77%, the lowest it's been in four months. This represents a significant drop from a recent peak of over 8%. For prospective buyers, this drop in interest rates could translate into significant savings over the life of the loan.
To put this in perspective, on a $300,000 mortgage, the difference between an 8% interest rate and a 6.77% interest rate is about $260 per month. Over a 30-year term, that adds up to a savings of about $94,000. This dramatic difference highlights why many buyers who were priced out of their options just a few months ago may now want to reconsider their options.
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Waiting can be dangerous
While the current trend in mortgage rates is encouraging, it's important to remember that economic conditions can change quickly. Inflation, which has been stubbornly persistent lately, could rise again, which could cause mortgage rates to rise again.
The Federal Reserve has indicated it plans to keep interest rates high until inflation is firmly under control. Many economists predict interest rates will be cut in 2024, but the timing and extent of any cuts is unclear. Locking in your interest rate now can protect you from any potential increases in interest rates in the future.
Housing inventory remains limited in most markets
While some markets are seeing an improvement in inventory, many areas still have a limited supply of homes for sale. If mortgage rates continue to fall, more buyers are likely to enter the market, which could exacerbate the inventory problem.
In a low inventory environment, attractive properties often have multiple offers and sell quickly, making it tough to close a deal on a home. But securing a mortgage rate now will put you in a better position to act quickly when you find a home that meets your needs. This is crucial in a competitive market where even a day of delay could mean missing out on a property.
If interest rates fall further, refinancing may be an option in the future.
One concern some buyers have about locking in a rate now is that they may miss out if interest rates continue to fall, but it's important to remember that refinancing is always an option if interest rates drop significantly in the future.
While there are some costs associated with refinancing, the savings you'll realize if interest rates drop significantly are likely to outweigh the costs. And by locking in a refinance now, you can ensure you get a rate that fits your budget today while providing flexibility in case interest rates fall in the future.
It may become more valuable in the future
While no one can reliably predict the future of the housing market, historical trends show that real estate tends to appreciate in value over time. This has been especially evident in the last few years, when a shortage of housing inventory has caused home prices to rise significantly, significantly increasing the equity the average homeowner has in their home.
You can start building home equity by locking in your mortgage rate and buying a home now. With every monthly mortgage payment, you reduce the amount you owe on your loan and increase your equity.
If home prices continue to rise, that can only be a positive for your property values, but even if home prices remain stable or even fall slightly in the short term, the long-term trend is generally upward, so it won't hurt to start the process now.
Conclusion
While the decision to buy a home is highly personal and depends on your situation, the current economic climate makes a compelling case for locking in a mortgage rate now. After all, the combination of low interest rates, limited housing inventory, and the potential for future market changes creates a window of opportunity for those who are ready to act.
But it's important to consider this decision carefully. Your financial situation, job security, and long-term plans should all factor into your decision. Remember, the goal isn't just to buy a home, but to buy a home in a way that meets your financial goals and lifestyle needs.
Angelica Leicht