Forecasting Mortgage Rates: Buy, Sell, or Refi?

If you’re like most people who are paying off a mortgage or looking to buy or sell a home, chances are you pay attention to where mortgage rates are heading. Mortgage interest rates directly affect your monthly payments and the cost of owning a home long term. Consider the following strategies when deciding to buy, sell, or refinance if rates stay the same, rise, or head lower.  

When Mortgage Interest Rates Hold Steady

Average interest rates for mortgages have been at historic lows for much of the last decade, which could put you in a good position to buy or sell a home. Low interest rates allow you to buy more house for the same monthly payment that you would be paying with a higher interest rate.

Interest rates have been extremely low but are starting to rise, with most experts expecting them to continue to rise. December 2020 had the lowest average rate on a 30-year fixed-rate mortgage at 2.68%. Rates continued to stay low with some minor fluctuations through 2021, but then started to rise in early 2022. In April 2022, the average rate was 4.98%, the highest rate since 2008.

The Federal Reserve raised rates on March 17, 2022, and is expected to do so again if the job market remains strong. While the Fed doesn’t directly set mortgage rates, it does set the federal funds rate. This is the rate at which banks lend money to one another. Changes to the federal funds rate can affect changes in bond yields, which in turn influences mortgage rates.

Using a mortgage calculator is a good resource to compare these costs.

If Mortgage Rates Drop

After years of historical lows, mortgage rates have been rising. Theoretically, at some point, they could go down again. If they do, the above still holds true.

If you have an adjustable-rate mortgage (ARM) and rates fall or remain the same, you may want to consider refinancing with a fixed-rate loan to take the stress out of worrying about rising rates in the years to come. Interest rates for ARMs, also known as variable-rate mortgages, are lower initially than fixed-rate loans for a given period—five years, for example. After the introductory period ends, rates rise according to market indexes, eventually surpassing the rate for fixed-rate loans.

If you have a fixed-rate loan and rates fall, it may be worth looking at refinancing it into a shorter-term loan. For example, if you have 20 years left on a 30-year mortgage, it may make sense to refinance the remaining 20 years into a new 15-year mortgage. Rates on 15-year mortgages are also lower than 30-year mortgages. Combine that with a rate drop, and you could save on the amount of interest paid and pay off your mortgage sooner.

When refinancing, always consider your unique set of circumstances. Factor in closing costs and how long it will take to realize the cost benefits. How long, for example, do you plan to live in your home before selling? Will you break even before you plan to sell? Generally speaking, the larger the outstanding mortgage, the more impact lower rates can have on your monthly payments. You might consider if a variable- or fixed-rate mortgage is a better option.  

And, of course, lower rates mean you can afford more house—and more people can afford your house—so it can be a good time to buy or sell a home.

Rising Mortgage Rates

When rates rise and you have a low-interest fixed-rate mortgage and are not looking to sell or buy, you can happily stay the course and sleep well at night. But if you need a larger home or have to relocate, keep in mind the long-term view that, historically, home values have kept up with inflation. In addition, as inflation rises, your mortgage payments on a fixed-rate loan remain the same.

Also, consider that median prices for homes have risen post-recession. If the value of your home has gone up, so has your equity. Equity is the amount of the home you own minus the outstanding loan balance. In a rising-interest-rate environment, you might want to reconsider whether now is a good time to refinance your mortgage.

A 10% rise in value on a $300,000 home means $30,000 more in your pocket when you sell. This can help with putting down a larger down payment when you buy your next home and help offset higher interest rates by lowering your monthly payment.

While a rising-interest-rate environment isn’t ideal for buying and selling, if it comes with more equity, that extra money can help cancel out the effect of higher interest rates. 

The Bottom Line

The consensus is that interest rates in 2022 and beyond will continue to rise, as the Federal Reserve has been periodically raising its benchmark rate and is forecast to keep doing so. This means that would-be homebuyers should consider acting now. Of course, there’s always the chance that rates will drop in the future. If so, buyers should be prepared to capitalize on any dips.

Because rates are still relatively low, homeowners with older mortgages who haven’t yet refinanced should consider whether it makes sense to do so to secure lower monthly payments. And homeowners with ARMs should not waste time considering whether they should switch to a fixed-rate loan. As always, closing costs and your own time frame (how long you plan to stay in your current home) should be factored in.