10/07/2023
“Marry the house, date the rate"
With mortgage rates at 7% and the median mortgage payment at $2,162 per month, this is the advice that many real estate agents are giving.
The idea is simple: When rates are high, competition is low, and it's easier for you to get a house you like. Since a house is a long-term commitment, you might as well "marry" it. As for the high mortgage payments, they depend on the Fed rate, and if rates drop down the line, you can refinance and save on payments.
But that's a BIG if.
Refinances can make sense if:
- Your term increases, but you pay less monthly or
- You pay more monthly, but your loan is paid off earlier
One risk with this strategy is: Buying into a house you can't afford, thinking that you can refinance at any time down the line. But if interest rates stay the same or go higher, you could be stuck paying huge monthly payments for a long time. Housing is everyone's biggest expense and it might burn a hole in your pocket.
The other risk is panic-buying into an overvalued property in a hot market. If it's a house you're going to stay in for a while, it's one thing. But cash-out refinancing is going to be a problem if the value of your home drops.
Finally, refinancing isn't free – it can cost 2 to 6% of your loan amount. Even if the rate drops, a high cost of refinancing would mean that the deal isn't worth it. And if you refinance and the rate drops further, you're going to facepalm that you didn't time the bottom.
NOBODY can predict interest rates, and while you could take advantage of a refinance in case rates do drop, planning your financial strategy for the next 15 to 30 years gambling on the interest rate can be a bad move.
If you're marrying the house and dating the rate, make sure it's a house you really like, and you can afford the payments even if the rates don't go your way.
