Due to high interest rates, many people are saying “buy now and refinance later.” But is this sound advice?
“Buy now, refinance later.” “Marry the home, date the rate.” This advice to buyers is floating around; should you listen? Let’s analyze this buying strategy from all angles.
First, interest rates have been climbing amid stubborn inflation. According to Freddie Mac, 30-year fixed rates are currently averaging about 6.73%. Only one year ago, the rate was 3.85%. Where will the rates go from here? Some economists think they will stay stable or even decrease. However, others say the inflationary pressure could push rates even higher.
The idea that buyers can take out a loan now and refinance in the future when rates drop is a popular one. This is particularly attractive to buyers who want to move ASAP. They enter with the hope that their monthly payments will ease up when rates drop, but there is no assurance of when that will be.
Basically, for a “buy now, refinance later” strategy to make sense, rates would need to drop by a certain amount. Unfortunately, nobody has the ability to predict if and when rates will drop. Moreover, for some buyers, rates may never go low enough for a refinance to actually save them money. Usually, a 1% rate drop is enough to warrant a refinance. In some cases, though, a drop of 2% is needed to make a noticeable change in monthly payments.
It all depends on your unique loan scenario. The type of loan you have, your exact numbers, etc. all matter when it comes to determining if “buy now, refinance later” is a smart buying strategy for you. Your specific type of loan may be easy to refinance — or conversely, not even possible without an equity gain. You should discuss your individual situation with your lender if you are indeed planning to refinance in the future.
Next, you shouldn’t forget the additional fees involved in a refinance. Closing costs include things like the appraisal fee, title services, and attorney fee. As a buyer, you can expect to pay 2 to 5% of the loan principal amount in closing costs. This means that even if rates drop 1 to 2%, numbers must be crunched to see if refinancing would save you enough money to make it worthwhile.
In conclusion, if you can only make a home purchase because you’re counting on refinancing in the future, think again. There is no guarantee that rates will decrease, at which point you’ll be stuck with more of a monthly payment than you’re willing to make.
To talk more about your home buying potential, contact Sandstone Financial’s Allycyn Bennett at 949.717.7290 to get pre-approved. If you would like to strategize about your next real estate move, contact your local agent at SurterreProperties.com today.
