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Mortgage rates are high. Should you buy now or wait?

It depends on whether the monthly payment works for you at today’s rate. If it does, buying now can make sense, and you may be able to refinance later if rates fall. A later refinance is possible but not guaranteed, so a plan that only works at a lower future rate depends on things you don’t control.

Should I buy now and refinance later?

Buying now and refinancing later works only if you can afford the payment at today’s rate without counting on the refinance. A refinance later depends on conditions outside your control, covered in the next section.

Marry the house, date the rate: what it assumes

The saying assumes you can refinance into a lower rate later, and that holds only when these conditions are met:

  • Rates fall enough. The drop has to be large enough for the monthly savings to matter.
  • You still qualify. A refinance is a new loan, so your credit, income and home value are checked again.
  • The savings earn back the closing costs before you move. If you sell or refinance again before then, the refinance doesn’t pay.

If any of these doesn’t hold, you keep the rate you bought with.

What does it take to refinance?

It takes a new loan application and qualifying again. Freddie Mac describes refinancing as essentially applying for a new home loan: you complete an application, provide income documents such as pay stubs, W-2s and tax returns, and the lender checks your credit. If the loan is approved, the lender usually schedules an appraisal to confirm the home’s current value.

The new loan comes with its own closing costs. Freddie Mac suggests a break-even check: divide the total cost of the refinance by the monthly savings to see how many months it takes to earn the cost back. If you might move before then, the refinance probably doesn’t pay. A “no-closing-cost” refinance still has costs. According to the CFPB, the lender either charges a higher rate and gives you a credit, or adds the costs to the loan amount.

What happens if rates drop after I buy?

On a standard fixed-rate loan, your rate stays the same unless you act. Refinancing is the usual way to get the lower rate, and your options when rates drop after you buy covers the others, including recasting and lender rate-reduction programs.

Which mortgage protects you if rates fall after you buy?

A standard fixed-rate loan doesn’t lower its rate on its own, and the alternatives work differently. An ARM’s rate can fall, but it can also rise. A float-down applies only before closing. A rate improver usually allows one drop, on request. After an initial fixed period, Marian’s rate can reset lower, down to a floor, and it never rises.

  • A float-down. Some rate locks let you move to a lower rate if market rates fall before closing. It applies only before closing, often only once, and you ask the lender to apply it. Without one, the CFPB notes, a rate lock can lock you out of a lower rate if rates fall after your loan offer.
  • An adjustable-rate mortgage (ARM). After its initial fixed period, an ARM’s rate can fall at scheduled adjustments if its index has fallen, and it can also rise, within its caps. See are adjustable-rate mortgages a bad idea?
  • A rate buydown. Points lower your rate in exchange for paying more at closing, and they pay off only if you keep the loan long enough. A temporary buydown lowers the payment for a limited time in exchange for an up-front fee or a higher rate later, according to the CFPB.
  • Lender rate-reduction programs. Some lenders, often credit unions, let you request a lower rate on your existing loan after market rates have fallen, without a full refinance. Fees and eligibility vary by lender. Some lenders offer programs marketed as a “rate drop guarantee,” a “rate improver,” “free refi for life” or a “refinance fee credit.” These programs cover or waive some fees on a future refinance, or allow a one-time rate reduction, usually with conditions.
  • Refinancing. A refinance replaces your loan with a new one at the rate available then, if you qualify and the savings cover the costs.
  • A down-only mortgage. After an initial fixed period, when market rates fall by a defined amount, the rate resets lower automatically, down to a floor, unlike the lender programs above. Marian Mortgage is a planned example of this kind of loan; Marian is pre-launch and not lending in any state. Read what a down-only mortgage is and how it compares with refinancing and other options.

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