Looming Mortgage Interest Cut May Cause the Lowest Rates for Years: How To Take Advantage
Written by
Jordan Rosenfeld
Edited by
Amber Barkley
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The Federal Reserve Board is meeting this month to discuss a small interest rate cut, which seems likely, given that the Board chair, Jerome Powell, said in an August meeting, “The time has come for policy to adjust.”
Rate drops have a direct impact on mortgage interest rates, as well, which are likely to drop if overall interest rates do. While these cuts may not be huge, they are likely to result in the lowest rates for years to come.
How can home buyers take advantage of these cuts? Real estate experts explain some considerations. Also, if you’re planning to buy a home soon, make sure you’re aware of the costs beyond your mortgage.
Opportunities To Refinance
One of the first things people who already own a home might do if rates drop is refinance, according to Andy Heller, real estate investor and owner of Regular Riches.
“Just because you bought property at a higher interest rate doesn’t mean you have to stick with that loan. So if rates fall, as long as you’re able to maintain your employment, you can always refinance that loan and bring down your payment dramatically,” he said.
You Get More Value the Longer You Hold On
While a rate drop might have you thinking about selling your primary residence and buying a new one, Heller suggested you might want to consider holding on to your property, if you’re not in a hurry to move anywhere, because your property will likely continue to gain value. This is especially true if the country heads into an economic downturn or recession.
He pointed out that people who bought homes in April 2008, just before the Great Recession, may have lost a significant amount of value immediately after, but if they held onto that home for another ten years, they more than likely made their money back.
A Primary Residence Is Almost Always Worth It
Heller, who has been investing in real estate for decades, said he wouldn’t hesitate to buy a primary residence today, even if he felt he was slightly overpaying. The key factors are knowing you’re going to stay in a home for a long time and having confidence that your job is stable.
Keep Emotions Out of It
It’s important to invest in property with a logical, not emotional, approach, Heller warned. “I think one of the biggest challenges that people have when they buy real estate is they’re not weighing the purchase properly. They’re not looking through the right glasses. They get emotionally involved in a decision. You’ve got to buy based on the factors on paper and try not to overpay.”
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Avoid Knee Jerk Reactions
Jake Leicht, a real estate investor and founder of Flip Secrets, a real estate school, urged home buyers to avoid any “knee jerk reactions to small rate cuts.”
He explained, “Let’s say the rate goes from 6.25% to 6.05% or something like that, all of a sudden there’s a ton more people that are looking at the houses that we have on the market, especially in the middle of the market.”
A market glutted with buyers can mean home prices go up, or it creates an environment of competitive bidding. Leicht would like to see more supply on the market to really meet consumer demands and urged caution.
Buy More House or Spend Less
What a rate drop ultimately means, Leicht said, is that “you can either buy more house or spend less money buying the same amount of house.”
For example, he explained, if someone is getting a $300,000 loan, their monthly payment goes down, so they could potentially now buy a $325,000 house. Or, on the other side of things, they simply spend less money for the same house that they were looking at previously with the higher interest rate.
Rate Drop Nominal for Investors
For those looking into investment properties instead of just buying a primary residence, small rate decreases will mean little, Heller said. “A small interest rate adjustment will have a nominal effect, because the numbers simply don’t work for investors. You can lower interest rates by half a point, or even two points, but if you’re not able to buy properties 20% to 30% below market, it’s not an optimal time for investors.”
Timing Is Important
Real estate investors rely on timing. “What attracted me to real estate is that it’s the one investment where you can leverage $5,000 and buy an asset worth a hundred thousand or more,” Heller said.
That, he said, is also what’s scary about real estate investing, because “you are taking a small amount of money, you’re buying a really expensive asset, and if you happen to time that poorly, that $5,000 can turn into a $95,000 loss.”
So timing is really important, especially if you’re buying an investment property.
If you’re already positioned to buy a home, a mortgage interest rate decrease could save you money in one way or another. However, if you’re not quite there yet, don’t let an interest rate decrease push you to purchase before you’re ready.
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