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Homebuyers coping with elevated mortgage interest rates have seen some relief in recent months as the average rate on a 30-year loan dropped slightly. After hitting its highest level since 2000 last year, and moving close to 8% last November, the average mortgage interest rate is now 6.57%. And that’s likely to fall further in the coming weeks and months.
Thanks to a consistently cooling inflation rate (it dropped again in July for the fourth consecutive month), cuts to the federal funds rate now appear imminent. Currently frozen at a range between 5.25% and 5.50%, many economists are predicting a 25 basis points cut in September, while others are expecting a full half-percentage point reduction. When that happens, mortgage interest rates will adjust, too.
Understanding this dynamic, then, homebuyers should be strategic in their approach. This extends to some simple but easy-to-make mistakes that should be avoided in today’s evolving rate climate. Below, we’ll detail three specific mortgage mistakes to avoid before interest rates drop.
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3 mortgage mistakes to avoid before interest rates drop
A cooling rate climate means homebuyers will need to change their approach. Specifically, they’ll want to avoid the following three mistakes:
Locking in a rate
During times of rate hikes, as we’ve experienced over much of the last two years, it behooves buyers to lock in a rate before closing to ensure that they don’t get stuck paying even more in the future. But that’s no longer the case. It would be a mistake to lock in a mortgage rate right now, despite the recent cooling, when the odds of a greater reduction in mortgage interest rates are as substantial as they appear. Instead, use this time to shop around to see which lenders are offering the most competitive rates right now, that way you’ll know which one to use when it does come time to lock in a rate.
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Being unprepared to act
In a changing rate climate, buyers should be as prepared as possible. You won’t want to miss a below-average rate opportunity by not having your paperwork prepared or by having subpar credit when it comes time for a lender to run a check. But being prepared doesn’t just mean being ready to open a loan. It also extends to homebuying overall. If you find your dream home you’ll need to be prepared to act to secure it, particularly as more homebuyers presumably enter the market as rates cool. Know your budget now — and what you can and can’t afford — so that you can make an aggressive offer should you find the home you want.
Not knowing the repercussions of waiting
It can be tempting to wait for interest rates to drop as far as possible before buying a home. But that could be a major mistake. Interest rate drops could complicate the homebuying process, by adding more buyers to compete against. Home prices could also rise as sellers note the competition for their homes. So while waiting for an interest rate drop, on paper, seems smart, it would be a mistake to not thoroughly understand the repercussions of doing so. In some instances, it may be smart to simply buy a home now, even with a slightly higher rate, and then refinance in the future versus dealing with more competition and higher prices in the months and (potentially) years to come.
The bottom line
Homebuyers have waited a long time for mortgage interest rates to drop but they shouldn’t let their excitement cloud their better judgment, particularly now. Specifically, they should avoid the temptation to lock in today’s lower rates with the chance of those rates falling even further soon substantial. But they should be prepared to act, both with a lender and in terms of making offers on for-sale properties. And they should be cognizant of the potential complications that may arise once rates do cool – and weigh the benefits of waiting for that to happen versus buying a home now. By avoiding these errors now, buyers will better position themselves to enjoy the benefits of a cooler mortgage rate environment, both now and in the months and years to come.
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