Although a decrease in mortgage rates is predicted for the coming year, potential homebuyers shouldn’t necessarily put off making a purchase because of the possibility of lower financing expenses.
According to a new housing estimate released by government-sponsored lender Fannie Mae, the rate on a 30-year fixed mortgage will decrease to an average 4.5% in 2023.
For prospective homebuyers who have watched mortgage rates soar this year, that dynamic would be a comfort.
To combat persistently high inflation, the Federal Reserve started raising its benchmark interest rate in March. This has led to higher borrowing costs for consumers, who may experience whiplash after 2020, when rates bottomed out near historically low levels.
According to Fannie Mae, average rates will drop from 5.2% in Q2 this year to 4.7% and 4.4%, respectively, in the first and fourth quarters of 2023.
However, Keith Gumbinger, vice president of market research company HSH, advises consumers to “take forecasts with a grain of salt.”
“If you’re participating in the marketplace, interest rates are important but might not be the most important component,” Gumbinger stated.
The effect of mortgage rates on your finances
A 30-year fixed mortgage’s rates have increased by more than two percentage points since the start of 2022. A 30-year fixed mortgage’s interest rate stays the same during the loan’s lifetime.
The week of June 23 saw rates average 5.55%, according to data from Freddie Mac, another government-sponsored organization. Despite a modest fall from the peak of 5.81% in June, that is a huge increase from the 3.22% the first week of January.
Consumers may be affected significantly by even a seemingly insignificant increase in mortgage prices due to increased monthly payments, greater lifetime interest, and a shorter overall loan.
Here is an illustration based on HSH data A house buyer with a $300,000 mortgage at a 3.5% fixed rate would pay approximately $1,347 per month and $185,000 in interest over the course of 30 years. For the same loan amount, homeowners would pay $1,703 a month and over $313,000 in interest at a 5.5% rate.
Here’s another illustration that makes the assumption that the buyer pays a $30,000 down payment and earns an annual pretax income of $80,000. According to HSH data, this buyer would be eligible for a $295,000 mortgage if rates were 3.5%, which is nearly $50,000 more than the same buyer at a 5.5% rate. That difference can make a particular home unaffordable.
What potential buyers should think about
As borrowing costs have increased, a lot of consumers have chosen adjustable-rate mortgages over fixed-rate mortgages.
According to Zillow data, more than 12% of mortgage applications in both June and July of this year were for adjustable-rate loans. This is the highest share since 2007 and double the percentage from January of this year.
Compared to fixed rate mortgages, these loans are riskier. They typically pay a fixed rate for five or seven years before it resets; depending on the state of the market at that point, consumers may be required to make bigger monthly payments.
Due to the security they give borrowers, fixed-rate loans are preferred by Kevin Mahoney, a certified financial advisor headquartered in Washington, D.C. When and if interest rates decrease in the future, homebuyers who currently have fixed mortgages may be able to refinance and cut their monthly payments.
In general, he warned, people should steer clear of utilizing mortgage estimates like those from Fannie Mae as a benchmark for their purchasing choices. Personal circumstances and preferences should be the main determinants of financial decisions, he added, adding that such projections sometimes turn out to be wildly erroneous.
“You could chase better numbers for years on end in some cases if things don’t go your way,” Mahoney, the founder and CEO of Illumint, a financial planning company geared toward millennials, said.
But if potential buyers don’t have a strict deadline for a purchase and have room in their budgets in case mortgage rates don’t move as anticipated, Mahoney noted, they could be able to risk waiting.
Gumbinger added that consumers would be better served to act immediately rather than wait if they locate a home they like and can afford to purchase.
For instance, if property prices remain high, overall affordability would probably still be a concern even if borrowing costs decrease next year.