Quintessential Mortgage Group, LLC
NMLS # 979266

Can we see a decline in Mortgage Rates in the near future?

June 6th, 2023

The housing market is facing the consequences of ten consecutive rate hikes by the Federal Reserve, as reported by the National Association of Realtors. Existing home sales experienced a decline of 3.4% in April. Over the past year, home sales fell by 23.2%, while home prices dipped by 1.7%, resulting in a median price of $388,800.

These higher interest rates have created challenges for prospective homebuyers looking to purchase their dream homes and homeowners seeking to refinance. Homeowners are finding it difficult to refinance at rates lower than their existing mortgage due to the elevated interest rates. During the pandemic, many homeowners took advantage of record-low interest rates ranging from 0% to 0.25% by refinancing their homes. In contrast, the recent 0.25% rate increase by the Federal Reserve has pushed the benchmark range to 5% to 5.25%, the highest level in 16 years.

When can we expect interest rates to decline?

The timing of a reversal in mortgage rates is uncertain, but experts have weighed in on the matter. Fannie Mae and the Mortgage Bankers Association predict a decline in the average rate on 30-year fixed-rate mortgages throughout 2023, extending into the first quarter of 2024. The Federal Reserve’s indication of a potential pause in future rate increases has fueled speculation. If the data shows a weakening economy and a further decrease in inflation, the expectation is for mortgage rates to decrease in the latter half of 2023.

What Industry Experts are saying: 

Chief Economist at First American Financial Corp, Mark Fleming, suggests that a drop in interest rates may not occur for several months and could potentially happen in 2024. However, even if rates decrease, they are not likely to return to the levels of the past. Fleming points out that 6% mortgage rates, which were considered normal in the past, would be a more reasonable expectation.

Adam Sharif, founder and chief strategist of nxtCRE, a platform for commercial real estate investors, agrees that any rate decrease would be modest and might not occur until the following year. Today’s interest rates are considered normal when compared to historical measures. In the face of rising interest rates, buying a home can still present a good opportunity for some, especially investors. If the intention is to hold onto the property as a long-term investment, its value may appreciate significantly over time, potentially offsetting the costs of higher interest rates. Additionally, anticipating a future drop in interest rates might provide an opportunity to refinance at a lower rate.

It is important to consider individual circumstances when deciding whether to buy a home in the current market. Home inventory remains limited in many areas, so a potential buyer who finds a home they love might be better off purchasing now, even with elevated rates, and aiming to refinance in the future when rates potentially decrease. Furthermore, buying a property for rental purposes, even in a high-interest environment, can make sense in certain scenarios. Rental income generated from the property may offset a portion, if not all, of the mortgage expenses, and there may be tax benefits associated with owning a rental property.

Regarding mortgage refinancing, it involves replacing an existing home loan with a new one, preferably at a lower interest rate. However, with rates currently double what they were in 2020, refinancing may not be the most advantageous option for those who obtained their existing mortgage before the Federal Reserve initiated its aggressive rate hike schedule.

Borrowers who refinanced during the historically low rates from 2020 to 2022 might not find it beneficial to refinance in the current rate environment. However, those who can take advantage of the increase in home values over the past few years may still benefit from refinancing to tap into their home equity or remove private mortgage insurance.

 Opportunities to refinance 

Right now there are other situations where refinancing might prove advantageous, such as:

Paying off the mortgage loan sooner: Refinancing from a 30-year to a 15-year term, despite higher interest rates, could result in significant overall cost savings. Shorter loan terms typically come with lower interest rates compared to longer-term mortgages.
Converting an adjustable-rate mortgage (ARM): Homeowners with adjustable-rate mortgages (ARMs) may consider transitioning to the stability of a fixed-rate mortgage, particularly if they face potential fluctuations in monthly payments.
Securing a lower interest rate: While not applicable to all homeowners, some may have higher interest rates on their existing mortgages compared to current lender offers. Factors such as higher rates at the time of securing the mortgage or a lower credit score during the loan application could contribute to a high-interest mortgage.
Before making any decisions, it is crucial to explore mortgage refinancing options and assess whether it makes sense in individual circumstances.

Attempting to time the market is not always the best strategy, and decisions should be based on budget and goals. This is why our team of professionals works with homebuyers and homeowners to gain a better understanding of the market. Conducting thorough research, considering the numbers, and evaluating potential costs and savings are important steps in making informed choices, and we’ll be there with you every step along the way. 

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