Why "Marry the House, Date the Rate" is Bad Advice

Real talk from a REALTOR®

Since March 2020, the real estate market has seen the best and worst times. Here are a few things that transpired over the last two years that will shape your feelings about the market:

• Sellers were able to bully buyers into submitting one-sided offers.

• Buyers were at the mercy of sellers and submitted offers hoping things would work in their favor.

• Real estate agents, mortgage lenders, and appraisers were benefiting from the unprecedented volume of work in the market.

If you want a single talking point to explain the main driver behind this, then look no further than historically low mortgage rates.

How it Started

During the last couple of years, buyers were eager to lock in historically low mortgage rates. The eagerness of buyers allowed sellers to sell homes at historically high prices. This would last for as long as mortgage rates remained low, which was the case between 2020 through 2021. However, the writing was on the wall as we entered 2022, the party was over and rates were going to rise.

At the end of 2021, the average 30-year fixed-rate mortgage was 3.11%. While mortgage rates were predicted to rise, it was hard to predict how much or how fast they would rise. Experts from all over the industry had their opinions, and here are a few:

• The National Association of Realtors predicted the 30-year fixed rate mortgage to average 3.9% by the end of 2022.

• Freddie Mac predicted the 30-year fixed rate mortgage to average 3.6% in 2022.

• The Mortgage Bankers Association predicted the 30-year fixed rate mortgage to climb to 4% by the end of 2022.

How it’s Going

Over the last year, mortgage rates more than doubled from where they were in January 2022. According to the Federal Reserve Economic Data, mortgage rates reached 7.08% on November 10, 2022. As of this writing, the average mortgage rate is 6.33%. The experts got it wrong, and in most cases, it wasn’t even close.

As we shift our focus from 2022 to 2023, the real estate market will continue to be at the forefront of many minds. Among those minds will be real estate agents who will find creative ways or slogans to convince buyers to purchase homes. One of those slogans is one you may have already heard:

Marry the house, date the rate

The idea behind this slogan is to buy the home you love regardless of the mortgage rate, then refinance into a lower rate in the future. Here’s what’s wrong with this slogan and why I do not recommend it.

Rates are Unpredictable

As we saw at the end of 2021, experts are bad at predicting where rates will be in the future. There is no guarantee that rates will come down enough so that it makes financial sense for you to refinance. And, if they do eventually come down, there is no telling when it will happen. This means, depending on your timeline, you may be waiting a long time for something that may not benefit you.  

The Federal Reserve is determined to lower inflation. One of the levers the Federal Reserve has to lower inflation is to raise the short-term interest rate. The annual inflation rate for the United States is 7.1% for the 12 months ended November 2022, according to U.S. Labor Department data. As a reminder, the Federal Reserve would like to bring the inflation rate down to 2%, and how long that will take, is anyone’s guess.

Although the Federal Reserve raising short-term interest rates doesn’t directly impact mortgage rates, they do influence them. Therefore, you may end up in a toxic relationship while “dating” the rate you never liked.

Home Prices Don’t Always Rise

Refinancing is similar to purchasing a home in that you will have closing costs and an appraisal. If the market has shifted by the time you decide to refinance, and your home appraises for less than what you owe, then refinancing to a lower rate may not be an option.

During the last two years, home prices were appreciating due to the limited supply of homes available. Buyers who were eager to take advantage of historically low rates were happy to outbid other buyers for the opportunity to pay well above a home’s asking price. For instance, a home listed in Arlington Virginia was on the market for $899,000, it received 21 offers and sold for $1,200,000.

The real estate landscape has changed due to mortgage rates more than doubling in the past year. Along with the rise in mortgage rates, we’ve seen a decrease in the number of buyers in the market. And as supply outpaces demand, sellers will become familiar with lowering their home prices.

While discussing the housing market on June 15, 2022, Jerome Powell, the Fed Chief stated:

We saw prices moving up very, very strongly for the last couple of years. So that changes now. This will be a process whereby ideally we do our work in a way where the housing market settles in a new place, and housing availability and credit availability are at appropriate levels.

Your home may make you richer or poorer. If you’re planning on refinancing your mortgage to have a lower monthly payment, then you shouldn’t be surprised if the home you purchase today, appraises for less than what you owe in the future.

Closing Costs

Closing costs will vary by lender and location. It’s important to talk to a knowledgeable lender who will provide you with information that’s in your best interest.

In most cases, you will not have to pay any money out-of-pocket to refinance your mortgage, as the closing costs can be financed into the new loan. However, you will need to know when the break-even point is to determine if your refinance makes financial sense. Some homeowners overlook this important calculation and focus more on the interest rate they’re being offered, and end up spending more than they should. For instance, if the break-even point for your refinance is five years, and you plan on moving in the next three years, then a refinance may not make financial sense.

As a homeowner, it’s in your best interest to work with your loan officer to determine the costs versus the monthly savings when refinancing your mortgage. Doing so will ensure refinancing your mortgage fits into your short-term and long-term goals.

Conclusion

Being able to refinance your mortgage to a lower rate is a tool that allows you to save money, but it should not be something you need to afford your home. Never buy a home you can’t afford or one that stretches your budget. Anyone who tells you otherwise does not have your best interest in mind.

Buying a home is one of your most important financial decisions. How much you pay for a home today will impact other areas of your life, including your savings rate, retirement timeline, and discretionary spending.

I urge you not to take advice that relies on too many “ifs” working in your favor. Because when the “if” you were promised doesn’t happen, you may be in store for a messy divorce.

Photo by Maria Ziegler on Unsplash