Should You Buy Now or Wait? What Higher 2023 Mortgage Rates Mean for Homebuyers
So you’re finally in the market to buy a house—congratulations! You’ve saved your down payment, improved your credit, and now you’re ready to dive in. But wait, have you seen the news about mortgage rates rising in 2023?
As the Fed raises interest rates to try and curb inflation, the mortgage rate is going up too. Now you’re worried you missed your chance at those amazingly low rates.
Should you rush out and buy now before rates climb higher, or wait and see if the market cools and rates come back down? It’s a tricky question, and the answer depends a lot on your own situation and needs.
The good news is, even with modestly higher rates, buying a home can still be very affordable. But you need to go in with realistic expectations about what you can afford so you’re not disappointed down the road.
30Year Mortgage Rates Are Rising in 2023 – What’s Causing It?
The current rate for today seems to be on the rise for 2023, and that means homebuyers can expect higher monthly payments if they purchase a house. What’s behind the increase? There are a few factors driving rates up:
The Federal Reserve is hiking interest rates
The Fed controls the federal funds rate, which determines how much banks charge each other for short-term loans. When the Fed raises this rate, the mortgage rate often follows.
The Fed has indicated it plans to continue bumping rates up in 2023 to help curb high inflation. Each increase means banks have to pay more to borrow money, so they pass those costs onto consumers in the form of a higher mortgage rate.
Inflation is reducing the value of the dollar
Rising inflation means the dollar you have today won’t buy as much tomorrow. To offset this loss in value, lenders charge higher interest rates. Inflation is currently at a 40-year high, so lenders are hiking rates significantly to maintain their profit margins.
Economic growth is strong
A strong economy usually means a higher mortgage rate. When the economy is booming, demand for homes increases. This high demand allows lenders to charge more without reducing the number of buyers. Strong economic growth and low unemployment, like we have now, give lenders confidence to raise rates.
While a higher mortgage rate isn’t ideal for homebuyers, the good news is rates are still historically low. If buying a house is in your plan for 2023, you may want to consider locking in a rate soon before they climb higher. Acting now could save you thousands over the lifetime of your mortgage.
How Much Could Mortgage Rates Average This Year?
The mortgage rate is expected to continue climbing in 2023. The Federal Reserve has indicated multiple interest rate hikes are on the horizon to help curb rising inflation. As the Fed raises rates, the cost of borrowing typically follows.
You can ask three economists if mortgage rates will increase further in 2023, and you’ll more than likely get three different opinions. As of August, 2023, the 30 year mortgage rate was 7.09%, and the opinion is that they may end the year around the same.
How Much Could Mortgage Loan Rates Go Up?
According to experts, mortgage rates could increase by at least half a percentage point, and possibly up to a full percentage point, by the end of 2023. That may not seem like a lot, but it can significantly impact your monthly payment and the total interest paid over the life of the loan.
For example, if rates go up by just 0.75%, a homebuyer taking out a $250,000 mortgage could end up paying $200-$300 more per month and $30,000-$50,000 more in total interest charges over 30 years. As rates rise, homebuyers will face some difficult decisions:
- Buy now to lock in a lower rate, even if it means paying a higher price as demand remains strong. Home values are still appreciating in many markets.
- Wait to buy in hopes rates and/or home prices decline, risking even higher rates and continued price growth. Timing the market is challenging.
- Consider an adjustable-rate mortgage (ARM) with an initial fixed period of 3-10 years. ARMs usually offer lower rates at first, but rates can increase substantially when the fixed period ends. This is a risky option if rates spike in the future.
- Explore other strategies like making a larger down payment, shortening the loan term, or choosing a mortgage with a shorter fixed period. Every little bit helps.
The bottom line is mortgage rates will likely be higher next year, so homebuyers should be prepared for the additional costs or have a plan in place to get the best deal possible based on their financial situation and risk tolerance.
With some creativity and professional guidance, you can still achieve your goal of homeownership, even if rates are not in your favor.
Pros and Cons of Buying a Home Now vs. Waiting
Buying a home is a big decision, and with mortgage rates on the rise in 2023, the pros and cons of purchasing now versus waiting are worth considering carefully.
Pros of Buying Now
- Lock in a lower interest rate. Although rates are climbing, they are still lower than historic averages. Buying now means securing a lower rate and paying less interest over the life of your mortgage.
- Build equity. As you pay down your mortgage principal, you build equity in the home. The sooner you buy, the sooner you can start building equity through your payments.
- Avoid higher home prices. Home prices are also expected to continue rising due to high demand and low inventory. Buying now allows you to purchase at today’s prices instead of paying more for the same home later.
Cons of Buying Now
- Interest rates could decrease. There is a chance rates could drop again in the coming years, in which case you may end up with a higher rate than if you waited. However, rates decreasing significantly is unlikely.
- Home prices may stabilize or drop. Some experts predict home price growth will slow or prices may even decrease in some markets. If you wait, you could potentially buy at a lower price. However, historically, home prices have always increased over the long run.
- Your financial situation could improve. If your income or credit score increases over the next year or two, you may qualify for a lower rate than you would today. You’d also have more time to save for a larger down payment.
Pros of Waiting
- You have more time to save. Waiting gives you an opportunity to save more for a larger down payment, which can help you secure a lower interest rate and monthly payment. A higher down payment also means less risk for the lender, so you may qualify for a mortgage more easily.
- Your situation may improve. If your income or credit score increases, you’ll likely get approved for a mortgage more easily and receive a lower interest rate.
Cons of Waiting
- Rates and home prices rise. The longer you wait, the more interest rates and home prices are likely to increase. Both of these factors mean your buying power will decrease and you’ll end up paying more for a home.
- Demand increases. Housing demand is high and projected to rise further. The more demand increases relative to supply, the more competitive the housing market becomes for buyers. Waiting could mean facing more competition for available homes.
In the end, you need to weigh all these factors and determine what makes the most sense based on your own financial situation and homebuying goals. Speak to a mortgage professional to help evaluate your options and determine if buying now or waiting is right for you.
Tips for Getting the Best Mortgage Rates for Today In 2023
So mortgage rates are on the rise for 2023. Don’t panic – you can still get a great rate if you act strategically. Here are some tips to help you lock in the best mortgage rate possible next year:
Shop around at different banks and lenders
Interest rates can vary between lenders, so compare offers from at least 3-5 places. Check both large national banks as well as smaller local lenders and credit unions. They may be able to offer lower rates and fees.
Improve your credit score
Your credit score significantly impacts the mortgage rate you’ll qualify for. Review your credit report for any errors and pay down your balances before applying for a mortgage. The higher your score, the lower your rate.
Consider an adjustable-rate mortgage (ARM)
ARMs typically offer lower rates than fixed-rate mortgages for the first few years. If rates are higher in 2023, an ARM could save you money, at least initially. Just make sure you understand how and when the rate may adjust to avoid payment shock.
Make a larger down payment
The more money you put down, the less risk for the lender and the lower your rate. Aim for at least 20% of the purchase price for the best rates. If that’s not possible, put down as much as you can.
Lock in your rate
Once you find a good rate, lock it in with the lender. Rate locks usually last 30 to 60 days. Locking your rate protects you in case market rates go up before your closing date. Ask about lock extension fees in case your closing is delayed.
Following these tips can help you secure a competitive mortgage rate, even with rates on the rise. While the market may shift in the lenders’ favor, you still have the power to get the best deal by doing your homework, improving your credit, and negotiating the best offer. With some strategy and patience, you’ll be signing the papers on your dream home in no time!
Alternatives if You Can’t Afford Today’s Mortgage Loan Rate
If today’s higher mortgage rates mean you can no longer afford your dream home, don’t despair. There are still options to consider so you can find a place to call your own.
Lower Your Down Payment
Putting down 20% or more on a home used to be standard, but in today’s market, lower down payments are common and can make monthly payments more affordable. Ask your lender about options for 3-10% down. The trade-off is you’ll pay a higher interest rate and expensive mortgage insurance.
Look at ARMs
Adjustable-rate mortgages (ARMs) offer lower initial rates that can save you money, at least for a while. Rates are fixed for 3-10 years, then adjust based on the market rate.
If rates go down, your rate could decrease. But if they go up, so will your rate and payment. ARMs are risky, so make sure your budget can handle potential increases down the road.
Consider Alternatives to Homebuying
Renting an apartment or home is an obvious option if buying isn’t feasible now. Rent for a year or two until rates improve and you have a bigger down payment saved. You might also look at:
•Renting to Own – You rent a home for a fixed period, part of which goes toward a down payment to eventually buy it.
•Adult Dorms – An affordable option for younger buyers. Rent a private or shared space in a building with shared community amenities.
•Tiny Homes – Tiny houses of under 400 square feet are gaining popularity as an affordable housing choice. You still need land to place the home on, either renting a plot or buying a small lot.
The most important thing is finding housing that fits your needs and budget. While rising mortgage rates can be frustrating, with some patience and creativity, you can find an option to suit your situation. The market will change, and you can revisit homebuying when the time is right for you.
So there you have it. 2023 is looking like the year of higher mortgage rates. As a homebuyer, the choice comes down to you. Do you want to lock in still historically low rates now before they climb higher, or do you want to wait and see if rates drop back down and home prices decrease? Only you know your own financial situation and risk tolerance.
If buying now feels right and you’ve found your dream home at a price you can afford, then go for it. Interest rates may be higher down the road and that house may not still be there. But if waiting seems smarter for your budget or life plans, don’t feel pressure to rush into a big financial decision before you’re ready. The housing market will still be there, and with any luck rates will settle back down again.
The bottom line is you need to do what’s right for you. Think it over, trust your instincts, and try not to get too caught up comparing yourself to what everyone else is doing. Your home is one of the biggest purchases you’ll ever make, so take your time and buy when the timing is right for you. The future is uncertain, but if you go in with eyes open and a plan in place, you’ll feel confident in your choice either way. Best of luck!