I will probably never refinance my house again. Don’t get me wrong, when rates have dropped in the past, I certainly took advantage of that. And when I needed some quick capital and preferred not to look for a new lender and get a new loan, I tapped into my home equity ATM.
But like many things, COVID-19 put an end to all that. When interest rates dropped like a rock in early 2020, I jumped at the chance to lock in a crazy low mortgage interest rate — 3.125% (the average refinance rate in 2023 was 6.4%). But the hard truth is, absent another lockdown pandemic, I will never find a rate like that again, and so to my old money pal, Mr. Refinance, adios!
If you’re interested in refinancing your mortgage, click here for our picks for the best refinance lenders.
That said, we are all now in a new era, a more traditional era, of dropping mortgage rates, what with the Fed’s two recent rate cuts and all. And that raises the question: Will lower mortgage rates really make home buying easier?
Let’s find out.
Lower rates, lower payments
Let’s start with the good news: In one sense, yes, lower rates seem to intuitively make home buying easier because lower mortgage rates mean lower monthly payments. If rates drop from 7% to 5%, that can take hundreds of dollars off your monthly mortgage bill. For many, this makes homeownership more affordable.
A lower interest rate also means you would pay less in interest over the life of the loan. Using a $300,000 mortgage as an example, a drop from 7% to 5% could save you more than $130,000 over 30 years. This all adds up. So far it looks like yes, lower interest rates do help make homeownership more viable.
But home prices may still work against you
That said, low mortgage rates alone will not always make home buying easier. Huh? Here’s the deal: In hot markets, even a sizable drop in rates might not help much if inventory is tight and home prices are climbing. Some housing markets still remain incredibly competitive, with homes going for well over asking prices.
So, in that case, while lower interest rates can help your budget stretch further, they may not stretch far enough to get you into that dream house you have been eyeing for the past year.
Lenders’ requirements can change
There’s also the not-insignificant issue of qualifying for a loan. Even though rates are lower, it does not necessarily follow that loans will be easier to get. Banks and lenders have their own underwriting requirements, and they can tighten those requirements as economic conditions warrant.
So, unless your credit rating, down payment amount, and debt-to-income ratio meet what the lender requires, those new, sweet, lower loan prices won’t make a whit of difference in your quest to buy a home.
Ahead of trying to buy a home, boost your credit score by paying down existing debt if possible, and getting copies of your credit report (which you can access from each of the credit bureaus for free once weekly through annualcreditreport.com) to ensure no errors are working against you. A higher score is likely to result in a lower mortgage rate and lower monthly payments.
Should I stay or should I go?
Let’s look at the numbers. If you took out a $300,000 mortgage at 7%, your monthly payment would be about $1,996. With a 5% rate, that same loan would cost you about $1,610 per month, saving you nearly $400 per month and over $130,000 in interest over the life of the loan. Those are real savings, but again, if home prices are rising in your desired neighborhood or lenders are picky, that rate drop might not be as impactful as you would have liked.
On the other hand, let’s say you look in a neighborhood that is reasonably priced, you find the right lender, and you have a large enough down payment amount. In this case, yes, those lower interest rates are going to help you either get into the home of your dreams, or get into a home that’s still decent, not pay as much, and pocket the difference.
In either case, a hearty congratulations would be in order!