Should You Wait for Interest Rates to Drop Before Buying a Home? Some Pros and Cons to Consider

As a realtor, I often hear homebuyers contemplating whether they should wait for interest rates to drop before purchasing a home. It’s an understandable concern—interest rates have a significant impact on your mortgage payments. However, waiting may not always be the best strategy, and here's why. In this article, we’ll explore both sides of the argument and use real data to help you make an informed decision. Just a friendly heads-up: these are my predictions about the market, and while I like to think I’ve got a good sense of things, the future can be a bit unpredictable!

The Pros of Waiting for Interest Rates to Drop

1. Lower Monthly Payments:

The most obvious advantage of waiting for interest rates to drop is that it can lower your monthly mortgage payments. A lower rate can save you thousands over the life of the loan. For example, on a $400,000 mortgage, a 1% drop in interest rates could reduce monthly payments by around $230 and save over $80,000 in interest over 30 years.

2. Increased Buying Power:

Lower rates can also give you more buying power. You may be able to afford a more expensive home because your mortgage payments would be lower at a reduced rate. This can be appealing, especially if you're looking to maximize your investment.

The Cons of Waiting for Interest Rates to Drop

1. Home Prices Could Rise:

One major downside of waiting is that if rates drop, more buyers may flood the market. This increased competition can drive home prices up. According to a recent report by the National Association of Realtors (NAR), home prices tend to rise when interest rates decline, as lower rates encourage more buyers to enter the market.

For instance, the housing market boom in 2020 and 2021, fueled by record-low interest rates, saw an increase in buyer competition, pushing home prices up by nearly 20% in some areas. So, while you may get a better interest rate, you could face higher prices and bidding wars.

2. More Buyer Competition:

As prices rise, the influx of buyers means more competition for available homes. A recent Redfin report found that in periods of low-interest rates, homes sold faster, and bidding wars became more common, often driving sale prices well above the asking price.
If you wait for lower interest rates, you may find yourself in a more competitive market, which can put you in a worse position than if you had bought earlier when the competition was less intense.

3. Uncertainty in Timing:

Predicting when interest rates will drop is extremely difficult. Federal Reserve policies, inflation, and other economic factors can change quickly, making it hard to know when rates will fall or if they will increase further. In 2023, rates hovered around 7%, but experts predict that while they may dip slightly, it's unlikely they will return to the ultra-low levels seen in 2020.
The risk is that while you wait for lower rates, they may not decrease as much as expected, or they may rise instead, leaving you in a more challenging position to buy.

Why Buying Now Could Be the Better Option

1. Today's Home Prices:

While interest rates are higher than they were during the pandemic, home prices in many areas have cooled or stabilized compared to the explosive growth in 2020-2021. This presents an opportunity to buy at a potentially lower price, with the option to refinance later if rates drop.
For example, according to Zillow, home price appreciation slowed to 2-3% in 2023 compared to the double-digit gains of previous years. This means that even if rates are higher now, you're paying less for the home itself.

2. Refinancing Opportunities:

One of the strongest arguments for buying now is that you can always refinance your mortgage if interest rates drop in the future. Many lenders offer refinancing options that allow you to lock in a lower rate when conditions improve.
According to Freddie Mac, the average homeowner refinances their mortgage within 5-7 years. If you purchase now at a higher rate and refinance later, you can take advantage of today’s home prices and benefit from a lower rate down the road.

3. Building Equity:

Buying a home now means you start building equity sooner rather than waiting on market conditions. Over time, your home's value may increase, and your mortgage balance will decrease as you make payments, building your wealth. Delaying homeownership could result in lost equity gains, particularly if home prices rise while you wait.

The Bottom Line: Should You Wait or Buy Now?

While waiting for interest rates to drop can seem like a smart financial move, it carries risks, including rising home prices and increased competition. No one can predict the exact future of interest rates or home prices, so waiting could leave you in a more challenging position later.

If you're financially ready to buy now, it might be better to take advantage of current home prices, build equity, and explore refinancing later if rates do decrease. As always, working with an experienced realtor and mortgage broker can help you navigate these choices and create a plan that works for your specific situation.

If you’d like to discuss your home-buying options or learn more about today’s market, I’d be happy to help guide you! And while you’re at it, grab my free guide below to become a homebuying expert—because who doesn’t love a little extra knowledge?

Brigitte Keene

Real Estate Agent & Investor

Scottsdale, AZ

Direct: (602) 806-8928

Email: info@brigittekeenerealestate.com

Website: www.brigittekeenerealestate.com