Mortgage rates are dropping, but is now a good time to buy a home?

Mortgage rates have already begun to fall from recent highs, due in large part to the Federal Reserve’s outlook for a slowing economy. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage fell to 6.35% on August 29, down from 6.46% a week earlier, the lowest mortgage rate in 15 months.

“Prospective homebuyers are likely to be able to get much more attractive interest rates today than they could have just a few months ago,” said Jacob Channell, senior economic analyst at LendingTree.

Still, many homebuyers are clinging to the fact that mortgage rates hit their lowest point just a few years ago, when the Federal Reserve slashed benchmark interest rates to near zero, said Dottie Herman, vice chairman at Douglas Elliman.

“I’ve been in the industry for 30 years and I’ve never seen 2.5% to 3% interest rates in my lifetime, except during a pandemic. I’ve never seen rates like that unless it’s government financing.”

Such “relativity bias” can be a hindrance to opportunity, she added. [the mortgage rate] It was at 15 percent, so I refinanced it.”

For people considering buying now and refinancing later, it’s important to understand the benefits and risks, and what type of mortgage you should take out.

First, unless the buyer has the cash to pay for the home up front, most home buyers will need to obtain financing for their home purchase.

“When taking out any loan, you need to know not only the upsides but also the potential risks that come with it,” said Melissa Cohn, regional vice president at William LaVais Mortgage in New York.

A zero down payment mortgage (also known as a no down payment mortgage) allows you to finance 100% of the cost of your home. These loans are attractive because they essentially allow you to buy a home with no down payment.

But experts say you might want to think twice before accepting such an offer.

Cohn said banks and lenders are essentially offering two loans to cover a home purchase.

The first mortgage covers about 97% of the cost, and the second loan makes up the remaining 3%, she explained.

And those loans often come due if the home is sold or the mortgage is refinanced at some point in the future, adds Keith Gumbinger, mortgage expert and vice president at HSH.com.

Another attractive option is a “buy now, refinance for free later” loan, but it doesn’t let you escape the costs of paying it off entirely, says Cohn.

“You end up paying a higher interest rate because you’re essentially paying the closing costs yourself,” Cohn says.

In other words, there is no such thing as a free meal.

“No bank is going to give you a loan with the lowest possible interest rate and truly no fees. They don’t exist,” Kohn said.

Also, buying a home with the intent to refinance always means gambling on mortgage interest rates, which carries a certain amount of risk.

“If you can buy a home based on interest rates and purchase price, buy now,” said Michael Crow, director of financial planning at Edelman Financial Engines.

The recent decline in mortgage rates could gain momentum as the Fed cuts its benchmark interest rate, but lower mortgage rates could also spur homebuying demand and drive up prices.

“If you can afford it now, it may not make sense to delay purchasing,” Crow says.

According to the LendingTree channel, what actually happens in the housing market is “undecided” and depends on how much mortgage rates fall and supply levels later this year.

“It’s virtually impossible to time the market,” he said.

Homebuyers who are ready to buy a home may be able to benefit from refinancing later, but there are no guarantees. Waiting for a better interest rate also comes with the possibility of having to pay a higher purchase price.

Ultimately, “there is no best time to buy,” says Douglas Elliman’s Herman.

“If you’re looking to buy a home and you see something you like, you should buy it,” she said.

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