During the early years of the pandemic, home prices skyrocketed, while mortgage rates dipped to as low as 2.78% for a 30-year fixed mortgage. But while home prices are finally starting to slow and even fall, climbing mortgage rates make buying homes and refinancing challenging.
On August 21, 2023, interest rates for a 30-year fixed mortgage reached 7.42%, while interest for a 15-year fixed mortgage climbed to 6.81%, according to Mortgage News Daily.
Those interest rate increases are due in part to the Federal Reserve fighting inflation by increasing its benchmark interest rate. In July 2023, the Federal Reserve announced the highest benchmark interest rate ever of 5.5%. Increasing interest rates is a method used to help slow and stop inflation by increasing borrowing costs and slowing spending. If inflation doesn’t slow, the Federal Reserve could increase the benchmark interest rate again this year, which would mean mortgage rates would climb even higher.
The seemingly ever-climbing mortgage interest rates can be frustrating for anyone trying to buy or refinance a home, and potential homebuyers may be forced to put their purchases off until interest rates drop. However, there’s plenty of uncertainty about just when that will occur.
We asked several experts when they thought mortgage rates might drop.
Jeremy Schachter, Branch Manager at Fairway Independent Mortgage, has more than 23 years of experience as a mortgage originator. Schachter explains that promising signs about mortgage interest rates are emerging, but slowly. “Inflation and mortgage rates go hand in hand,” he says. “And once inflationary reports show that inflation is easing, mortgage rates will ease. Many experts predicted by May or June of this year, which had not happened. Slowly, reports are indicating that inflation is easing. This is apparent in the recent ADP Job report that showed job growth slowed by 17,000 jobs.”
Andrew Lokenauth, CFO, and owner of Be Fluent In Finance, explains that there are some signs that mortgage rates could start to go down in the near future. “One reason for this is that the housing market is starting to cool off,” he says. “Home prices are rising at a slower pace, and inventory is starting to increase. This could lead to less demand for mortgages, which could put downward pressure on rates.”
“Another reason for optimism is that the economy is slowing down,” explains Lokenauth. “This could lead to the Federal Reserve being less aggressive in raising interest rates.”
If interest rates drop, it’s possible that the lower rates could drive home prices up. “This is because lower rates make it more affordable for buyers to bid higher prices on home,” he says. “However, it is important to note that other factors, such as supply and demand, also play a role in determining home prices.”
Craig Garcia, President at Capital Partners Mortgage, believes that mortgage rates will go down “when it appears the job market is really weakening significantly and inflation is continuing to be in check.” He notes that if rates decrease, more buyers could enter the market and potentially drive home prices up. “Although, if rates went down enough to make it more digestible for current owners to want to give up their current low rate to move, this could open up inventory to a more balanced level,” he says.
Schachter notes that when interest rates drop, it’s likely that we’ll see more activity in the real estate market. “The real estate market has to become unstuck, meaning that you will give up your ultra-row rate on your current mortgage for a slightly higher rate,” he explains. “Once rates come down, more sellers will sell and more inventory will be on the market. And more buyers will be out. With the majority of recessions, home values have gone up and not down. The demand is still high and the supply is still very low.”
Lokenauth recommends that anyone interested in buying a house make sure that they can afford the monthly payments at the current interest rate. “Second, you need to factor in the costs of closing and refinancing when you are making your decision,” he says. “Finally, you need to be aware that there is no guarantee that interest rates will go down in the future.”
Mitchell G. David, Founder of Beach Life Premier Team, notes that selling a home is a good choice in the current housing market, and it may still be a good choice by the end of next year. However, from the end of next year on, sellers might start losing their upper hand. “For someone planning to buy a home in the next year or two, it’s crucial to start early by assessing their finances, improving credit, and saving for a down payment,” he advises.
David recommends that interested buyers monitor mortgage interest rates and research market conditions in their desired area. Even if buyers aren’t going to buy a home immediately, there’s still plenty they can do to prepare for when the time is right to buy. “Creating a comprehensive budget, considering long-term goals, and exploring government programs can help determine affordability,” says David. “Seeking advice from professionals and staying informed about market trends will enable them to make an informed decision and navigate the homebuying process effectively.”
While many conventional loans only require a 3% down payment, that’s not necessarily an ideal option for buyers. McDermut notes that a 20% down payment is often ideal. “However, with home prices on the rise, 10% has been more reasonable and common,” she says. “Of course, the most optimal solution is an all-cash offer, but that is not always a possibility.”
McDermut advises buyers to put at least 20% down if possible. “Additionally, homebuyers should have reserves saved for potential repairs or improvements on the home. I recommend at least $5,000 to $20,000, depending on the condition of the home being purchased. If it is a ‘fixer-upper,’ then usually a bit more would be needed. If it is a move-in ready home, then less is required for repairs,” explains McDermut.
Buyers considering the Zillow Home Loans program should consider all of the pros and cons that come with a smaller down payment. Taking advantage of the program might get buyers into a home faster, but they could pay more over the life of their mortgage unless they are able to start making larger mortgage payments to put more money toward their loan principle. With the potential for a mortgage to go underwater more easily with a small down payment, Zillow’s program is probably only best for homebuyers who are planning to stay in their home for at least five years.
Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.