Mortgage Rates Fall Again — Is This a Better Time To Buy?

Mortgage rates are down slightly from a recent high of 7.23% — the highest rate in nearly 23 years, according to data from Freddie Mac. At 7.19% the week of Sept. 21, the average rate is still more than half a percentage point higher than the 52-week average of 6.64%, leaving prospective buyers wondering whether to get in now or hold out for a lower rate.

Read: 3 Things You Must Do When Your Savings Reach $50,000

Is This a Better Time To Buy a House?

The honest answer is, there’s no one-size-fits-all “better” time to buy. Prospective buyers hoping to time the market might see lower (for now) rates as a signal, but it’s important to consider home prices, too.

When interest rates started to decline in late 2018, home prices had already been creeping up for years following the Great Recession. And what had been a slow increase made a drastic leap as the pandemic took hold, sending prices soaring 49% in just two years — a larger increase than consumers had seen in the previous nine years.

While home prices declined sharply after peaking in late 2022 and are still falling, albeit more gradually, Federal Reserve data shows that they’re still 29% higher than they were in the second quarter of 2020.

Interest rates also fell sharply in late 2022 but were on the rise again just a couple of months later. Despite some volatility, where rates are up one week and down the next, they’re still trending upward.

If Federal Reserve officials were correct in predicting one more federal funds rate increase this year, the upward mortgage-rate trend could continue into early 2024. That could make this the last opportunity to buy before a potentially more significant increase that could keep rates high for several months — but the tradeoff could be paying a higher price for the home than you might pay if you wait.

If there’s anything to be learned from the last few years’ housing market, it’s that you can’t time it. A better strategy is to consider how interest rates affect your homebuying budget but base your purchase decision on your financial position and goals and the conditions in your local market.

How To Decide If This Is the Right Time for You To Buy

Deciding whether this is the right time to buy comes down to two questions. Can you afford it? And does the timing make sense?

Can You Afford It?

Fannie Mae’s Home Purchase Sentiment Index for August revealed that just 18% of consumers think it’s a good time to buy, and most cite affordability as the reason. However, “affordable” is a relative term, and it’s something you’ll have to consider regardless of whether rates and prices are headed up or down.

A good first step is to research home prices in the area you’d like to live. Real estate portals like Zillow and Realtor.com let you search prices of closed sales so you can see how much homes are selling for vs. how much sellers are listing them for.

Next, request prequalification (not preapprovals) from a couple of lenders to see how large a loan you might qualify for. Make sure the lender only does a soft credit pull, which won’t affect your credit score — a hard pull could knock your credit score down several points, so it’s best to hold off on that until you’re ready to buy.

Now look at the financial considerations to see how they align with your financial situation.

Down Payment

A 20% down payment is ideal because it starts you off with a good bit of equity. It also lets you avoid having to pay mortgage insurance and it could earn you a lower rate. However, you can get a conventional loan with just 5% down or an FHA loan with 3.5% to 10% down, depending on your credit score.

VA and USDA loans don’t require a down payment. Buying with no money down, however, puts you at greater risk of owing more than your home is worth if prices keep dropping.

Debt-to-Income Ratio

Lenders cap the amount of debt you can have and still qualify for a mortgage loan. The standard maximum debt payment total is 43% of your pre-tax income, including your house payment (principal, interest, property taxes, homeowners insurance and, if applicable, homeowners association fees), and some loans allow up to 50%. A lower DTI, ideally 36% or less, suggests you’re living well within your means, especially if the DTI for your house payment alone is 28% or less.

A mortgage calculator will figure out the loan payment amount for various scenarios you enter. Divide that payment amount, and then divide your total debt payment amounts, by your gross monthly income to get your DTIs.

Closing Costs

Closing costs, which include loan fees and fees related to transferring ownership of the property from the seller to you, usually amount to 2% to 6% of the loan amount. Although you might be able to roll these costs into your loan or get a lender credit in exchange for a higher interest rate, the ability to pay these costs yourself, in cash at closing, is a good sign that you can afford the home.

Does the Timing Make Sense?

The timing might be right if the following are true:

• You’re paying high rent and/or are facing a significant rent increase

• You’re ready to make a long-term commitment — buying in a volatile market is risky if you only plan to live in your home for a few years

• There’s some inventory of homes within your budget, in an area where you’d like to live

• You have good credit — a 620 credit score at the very least for a conventional loan, and preferably a 760 or better to qualify for the best rate

• You’ve got enough savings for unexpected events like job loss or major home repairs in addition to funds for the home purchase

How To Get the Best Rate in Any Market

The ultra-low rates buyers enjoyed prior to the first federal funds rate hikes in early 2022 were an anomaly consumers are unlikely to see in the near future, if at all. But you have several options for minimizing the impact of a high-rate environment:

• Compare rates from several lenders.

• If you’re a first-time homebuyer, check to see if your state, county or city — or even your lender — has grants or loans that make homebuying more affordable.

• Consider paying points to reduce your interest rate.

• Get a 15- or 20-year loan term if you can afford the higher payments.

• Lock in your rate as soon as your offer is accepted.

In the end, the best time to buy a home has little to do with economic conditions and everything to do with your personal financial situation and goals.

This article originally appeared on GOBankingRates.com: Mortgage Rates Fall Again — Is This a Better Time To Buy?