Should I buy a house now or wait for rates to fall?

With 30-year mortgage rates significantly higher than just a couple of years ago, does it make sense to buy a home now or wait and hope that rates fall? 

There’s no question that most of us would rather pay an interest rate of 3%, not 6-8% (or more), on the money we’ve borrowed to buy our home. On a $400,000, 30-year mortgage, a difference of three percentage points equates to roughly $700 a month.

The answer to the “buy now or wait” question really depends on the answers to several other questions. Some relate to your personal situation, while others are outside of your control. 

Questions to ask when you're considering buying a home

Within your control

Personal

• How critical is your need for a new home now?
• Can you stay where you are and wait, or do you have to make a decision soon?
• Is buying a home (rather than renting) your current best option?
• Are homes that fit your needs (and at least some of your wants) available in your price range?
• What impact would a higher mortgage payment have on your financial life and goals?

Those are all decisions you can make, and some are factors you control. 

Outside of your control

Industry

• Are mortgage rates likely to rise, fall, or stay relatively constant during the time you have to make a decision?
• Are housing prices in the area(s) you’re considering likely to rise, fall, or stay constant during that same timeframe?
• Will lenders make it easier or more difficult to qualify for mortgages? 

Only you can speak to how urgent it is that you buy a home. But, if you’re on the fence, consider these three factors first.

Mortgage rates and housing supplies

Are mortgage rates likely to rise, fall, or stay the same over the next year or so? To answer that question, it’s important to understand what causes mortgage rates to change.

Many people assume that when the Federal Reserve (aka the Fed) raises or lowers rates, mortgage rates will follow. 

The reality is that mortgage rates are more tied to the general economy and inflation than what the Fed does. 

If the economy is strong and borrowers are making payments, lenders (and mortgage lenders) perceive less risk and are more likely to offer favorable rates. 

On the other hand, if inflation and unemployment are rising and borrowers are struggling, lenders will raise rates to protect themselves against the risks they perceive.

Experts predict that mortgage rates will drop a bit before year-end, but don’t expect the almost historically low rates of just a few years ago.

Based on that, does it make sense to wait? That also depends on what happens with housing prices. If mortgage rates drop, but housing prices rise, there’s no benefit to waiting.

The good news is that the housing market appears to be easing. Industry data shows that the crazy market that saw homes receiving multiple bids above the listing price is on its way out, though some areas may still be seeing that type of activity. 

Even so, industry experts say the supply of homes on the market is still tight overall, and homes are selling quickly.

The good news is that there are programs for first-time homebuyers and buyers who don’t have much to put toward a downpayment. 

Check with state and county agencies and lenders, especially credit unions, to see what programs are available in your area. 

Many programs for first-time buyers also include educational programs, and some offer financial grants that can help offset costs.

Think beyond dollars and cents

Buying a home is a huge commitment of time, money, and energy. Before making that decision, be honest about your situation. 

Is your career stable, with regular raises likely? 

Will buying a home leave you with enough left over to pay for the inevitable repairs and maintenance? 

How will you furnish your new home and pay for the equipment, such as yard equipment, that you may need to maintain it? 

Are you sure you will stay in the same area long enough to justify a home purchase? (Selling a home within a year or two after buying it can be an expensive proposition.)

If you have a partner, do you agree this is the right move and the opportune time? The obligation of owning a home together can put a strain on a relationship. The first time something breaks or leaks, and there’s no longer a landlord to call can be an eye-opening experience.

It’s easy to see housing prices rise and feel an urgency to buy now. But don’t let FOMO drive an expensive purchase such as a home. And if now is the right time, but you can’t find the home you want at a price you can afford, it’s okay to wait. Houses aren’t going to disappear.