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Opinion: Should you ‘marry the house, date the rate?’

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"Marry the house, date the rate.” It’s a catchy phrase but is it actually good advice for a homebuyer? Of course, the answer depends on a variety of things.

Let’s start with what the phrase means. Conventional wisdom says that if you fall in love with a house you’d like to purchase, then you should commit to that long-term relationship – or marry it, so to speak. The interest rate to afford that relationship, however, doesn’t require the same level of commitment; you can “date the rate” and change it later down the road when rates might be lower.

Current markets
If you’re a first-time homebuyer, it’s likely you’ve never seen interest rates above 5% for most of your adult life. Until recently, interest rates remained historically low since the start of the Great Recession in 2008. The Federal Reserve intentionally kept interest rates low so that Americans could continue to cheaply borrow money. This would help stimulate the economy and keep cash flowing.

All of this changed during the COVID -19 pandemic when the Fed lowered their overnight lending rate to 0%. This was done again to keep the economy going and to keep money extremely cheap to borrow during the government shutdown and abrupt slowdown in the economy.

During this time, rates were as low as 3% on a conventional 30-year fixed-rate mortgage. All of this resulted in significant inflation and is a big part of why rates are so much higher now, as are home prices. At the end of the summer of 2022, inflation was running about 8.3%, which was the highest it’s been since 1981, according to data tracked by the U.S. Bureau of Labor Statistics. Unfortunately for homebuyers, the government’s main tool for controlling inflation is adjusting rates.

So, the question is, will interest rates drop soon? No one can truly answer this, but there is enough historical evidence to make some educated guesses. In the past, rates have taken anywhere from 18 months to 10 years to come down.

In the 1980s, when there was runaway inflation above 13%, it took almost 10 years; in 1989 the Fed raised rates to 15% to finally bring it under control. More recently, in the summer of 2000, rates came down much more quickly. It took just under 18 months for rates to drop almost 1.5%. In most instances, the Fed is looking to use lending rates to meet its self-imposed 2% inflationary goal rate, a baseline of what it considers normal growth for the nation’s economy. 

Navigating refinancing
Now back to the beginning. You’ve found your dream home and don’t want to miss out on it in a still somewhat competitive market. If you feel comfortable with the current rate and payment, the question becomes whether you can refinance it to a lower rate when rates come back down.

The answer is probably yes, depending on the terms of your loan. Most loans do not have any prepayment penalty, so you could refinance at any time. Some government loans, such as Federal Housing Administration and Veterans Affairs loans, may require up to seven on-time payments before you can refinance but allow it after that.

Deciphering advice
So lastly, when does it become worth it to refinance your home? One question to examine is how long you see yourself in the home. If you are planning on only being in the house a couple of years, then it would not be practical to think about refinancing later.

The National Association of Realtors says the average homeowner stays in their residence between 10 and 13 years. Without knowing when rates might go down, or if the home’s value may change when rates change, you should only buy what you can afford now. Don’t risk your financial future on an assumption that rates will go down and make your house payment affordable.

Dating the rate isn’t for everyone, but finding that house you fall in love with – provided you can afford the payment regardless of the interest rate – is worth every penny.

Michael Frerking is a senior vice president and director of residential lending for OMB Bank. He can be reached at m.frerking@oldmobank.com.

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