Should I wait for lower interest rates to buy a house?

Are you hoping to buy a home in the near future, but waiting for interest rates to drop? You're not alone. According to US News Money, nearly two thirds of prospective home buyers have haulted their home search until mortgage interest rates come down from their current level.

On the surface, waiting for interest rates to stop seems like a great idea. After all, interest rates affect a prospective home buyers' purchasing power. However, waiting for rates or prices to drop before sealing the deal comes with its own pros and cons.

Pros to Waiting

You could qualify for "more home"

Simply put: when interest rates rise, it'll cost you more to afford the same home. That means higher interest rates may put your dream home or community out of your reach. If you are able to snag a lower interest rate, could have the ability to getting a bigger bang (or house) for your buck!

Potentially more inventory

With the current state of the housing market, many homeowners who had either purchased or refinanced in the last few years are deciding to stay put rather than make a move due to the rise in interest rates. If you wait for a the interest rates to drop, more homes will start to change hands giving you a higher chance at snagging your dream home.

If another move is in your near future, renting may be a better option

Buying a home isn't always the right choice. If you're not planning on staying in a particular area long-term, purchasing a home with a high-interest home loan may not make the most sense.

Potentially more funds to close

The traditonal requirement for conventional mortgages is a down payment of 20% of the sale price- but that's not entirely necessary. Some lenders allow borrowers to put as little as 3% down, but usually you will be required to pay private mortgage insurance. Waiting to purchase a home until interest rates drop could allow you more time to save away that nest egg and be able to put more money down.

Purchase interest rates tend to be slightly lower than refinance interest rates

It's true that you can always refinance your home whenever you so choose. However, when you are opening up a mortgage (for a purchase) the interest rate tends to be slightly cheaper/lower than if you were to purchase at a higher interest rate and refinance later. Refinance rates tend to be a bit higher than purchase rates, for instance, cash-out refinance rates a higher because they're considered riskier in the eyes of a lender.

Cons to waiting

There's no guarantee rate will go down

Federal interest rates and other mortgage rates influenced by them move in cycles. While we know mortgage rates have been much lower in recent past, they've also been much higher historyically. In fact, today's rates actually aren't that high compared to historical standards.

While mortgage rates could begin to go down this year there's no way to say for certain whether they will or by how much.

Higher competition for home buyers

Over 50% of prospective home buyers have stalled their home search specifially due to interest rates. When interest rates drop, it's likely there will be many more home buyers scouting properties. Think many multiple offer situations (easily 10+ offers per home), quick deadlines, highest and best offers, no inspections, no contingencies, favoring all cash, no seller paid closing costs, quick close, free rent seller back, etc. Interest rates may be lower, but that wouldn't matter if you can't get a purchase offer accepted. Would that be the kind of market you'd like to compete in?

Potentially less inventory

So I know this also could be a "pro" in waiting for interest rates to drop, BUT there's no gaurantee that those same home sellers won't be your purchasing competition. If someone is selling their home, it's likely that they'll also need to purchase. So yes, they are creating inventory for the housing market, but they're also taking inventory away at the same time... AND they will probably have the equity and funds to stand out as competition.

You may miss out on your dream home

You may have heard of the saying, "marry the house, date the rate." What this means is, if you find a home you love and can afford, don't let higher interest rates prevent you from making an offer. Would you put your life on hold for something that you'er unsure of?

You're not building your own equity

One of the biggest negatives about waiting to buy a home (in any type of housing market really) is that you delay the start of your wealth building journey. When you own a home, you start creating equity almost instantly. When you sell, that equity can be potentially reinvested into other things like a larger home, consolodating debt, purchasing an investment property, or even starting a business.

If you're currently renting, the truth is that you're still paying a mortgage, it's just not your own.

The bottom line

There's no reason to put your life on hold due to the possibility of interest rates dropping. It's impossible to predict the future, so rates could remain high for longer than expected (or what if today's rates are the new normal?). But if buying a home is your goal and within your budget, the best time to buy a home is when you're financially ready.