Recent homebuyers have had to overcome a series of hurdles to navigate the housing market, from low resale inventory to high home prices. To make matters worse, the 30-year mortgage rate has held steady above 6% over the past year.
On that last point, however, buyers were advised not to worry: They can always “buy now and refinance later” to a lower rate – and many are heeding that advice, according to a U.S. News survey.
Between Sept. 1 and 7, U.S. News ran a nationwide survey of 1,200 Americans who had bought a home in the past year using a mortgage, conducted through PureSpectrum. We asked respondents a series of questions about their new home loans, including whether they plan to refinance, how low rates need to drop for them to refinance, and how they feel about taking out a mortgage when rates were high. Here’s what we found:
- Most recent homebuyers (82%) were assured they could “buy now and refinance later.” They most often heard this from their mortgage loan officer (63%) and/or their real estate agent (60%). But 13% say they won’t be able to keep making payments if they can’t refinance – among borrowers with an adjustable-rate mortgage, that figure is higher at 16%.
- The vast majority (84%) plan on refinancing to a lower rate in the future. When asked how low rates would need to fall for them to refinance, 43% of respondents say between 5.5% and 6%. About a fifth (19%) plan to wait for rates to drop below 5%, which isn’t expected to happen until 2025. However, nearly half (47%) think they’ll be able to refinance in less than a year.
- Over half of recent buyers (55%) regret taking out a mortgage when rates were high. First-time homebuyers were much more likely to experience regret than repeat buyers, at 62% versus 39%, respectively. Additionally, 50% of all respondents feel trapped by their current mortgage rate/monthly payment, including 56% of first-time buyers and 36% of repeat buyers.
- Most homebuyers (78%) are at least “somewhat” stressed that rates are expected to stay elevated for the rest of 2023. First-time buyers are more likely to report being stressed than repeat buyers, at 81% and 72%, respectively. A quarter of first-time buyers (25%) feel “very” or “extremely” stressed about this, compared with the 18% of repeat buyers who feel the same.
- Nearly all respondents (93%) took steps to try to get a lower mortgage rate when buying their home. About two-thirds (64%) shopped around with multiple lenders, and a third either took out an adjustable-rate mortgage (35%) or chose a shorter mortgage term (35%). Additionally, 19% bought mortgage discount points.
Buy Now, Refi Later? That’s the Plan for Most Recent Homebuyers
Rising mortgage rates have been top of mind for the past year’s homebuyers, who are already contending with stubbornly high home prices. To alleviate their concerns, 82% of those who bought a home in the past year were assured they could “buy now and refinance later” to a lower rate in the future. Here’s where they heard this phrase:
- Their mortgage lender/loan officer (63%).
- Their real estate agent/broker (60%).
- Family, friends or co-workers (28%).
- On the news (11%).
It’s evident that most homebuyers have decided to follow this guidance. About the same percentage (84%) say they do plan on refinancing to a lower rate. Among them, 43% are waiting for rates to drop between 5.5% and 6% in order to refinance, while 22% will wait for rates to fall in the 5%-to-5.5% range.
Nearly a fifth (19%) are waiting for rates to drop below 5% to refinance, and that’s not forecast to happen until 2025. That being said, 47% of those who plan to refinance think they’ll be able to do so in less than a year, and about three-quarters (73%) believe they’ll be able to refinance within the next two years.
For a handful of homebuyers, their financial security depends on their ability to refinance to a lower rate in the future. About one in eight (13%) say they don’t think they can keep making their mortgage payments if they can’t refinance. If they’re unable to pay, 25% would request mortgage forbearance, 22% would apply for a loan modification and 13% would sell their home. A few respondents answer that they would have to declare bankruptcy.
Payment instability is even more prevalent among those who borrowed an adjustable-rate mortgage, or ARM, which comes with an interest rate that can change over time. About one in six ARM borrowers (16%) say they won’t be able to keep making payments if they can’t refinance, compared with 11% of those who borrowed a fixed-rate mortgage.
First-Time Homebuyers Are More Likely to Feel Regret and Stress
More than half of those who bought a home in the past year (55%) regret taking out a mortgage when rates were high. Among homebuyers who don’t regret their decision, 50% say they needed to buy a house at the time, 29% say they don’t think their rate is that high, and 19% say they still feel that they can refinance to a lower rate in the future.
But there’s a considerable split between first-time homebuyers and repeat buyers. While 62% of first-time buyers regret acting when rates were high, just 39% of those who have bought a home before say the same.
Additionally, first-time homebuyers are more likely to feel “trapped” by their mortgage rate and/or monthly payment. Among all homebuyers, there’s a 50/50 split as to whether they feel trapped; but when broken down further, 56% of first-time buyers feel this way, compared with 36% of repeat buyers.
There’s also a correlation between previous homeownership and perceived stress. As a whole, most homebuyers (78%) are at least “somewhat” stressed that mortgage rates are expected to remain elevated for the rest of the year. First-time homebuyers are more likely to report feeling stressed than repeat buyers, at 81% versus 72%, respectively.
It makes sense that repeat buyers are less concerned about their mortgage rates than first-time buyers. Although most repeat buyers (54%) say their new mortgage rate is higher than the one on their old home, a quarter (26%) say their current rate is lower and 18% say their rates are about the same. From a historical perspective, 7% mortgage rates are fairly on par with what homebuyers have paid in the past, whereas the 3% rates seen during the COVID-19 pandemic were a relative anomaly.
What Today’s Buyers Can Learn From These Findings
‘Buy Now, Refi Later’ Isn’t a Guarantee
While it’s true that homebuyers can always try to refinance down the line, it’s a challenge for even the most seasoned real estate economists to predict where mortgage rates are headed. Some homebuyers we surveyed have unrealistic expectations for how low mortgage rates will fall in the future and how long it’ll take to get there, which can spell trouble for the 50% of respondents who feel “trapped” by their current rate and/or monthly payment.
The possibility of refinancing to a lower rate in the future should be seen as a bonus, not a guarantee. If you buy a home at current mortgage rates, make sure you’re comfortable with the monthly payment without needing to refinance. Especially if you’re considering an adjustable-rate mortgage, be sure you can afford higher monthly payments in the long term in case you can’t refinance before the rate adjusts.
Don’t forget that you’ll have to pay closing costs when you refinance your mortgage. Do the math to find your break-even point – that is, the number of payments you’ll have to make in order for your interest savings to offset the cost of refinancing.
It Pays to Shop Around for a Lower Mortgage Rate
Nearly two-thirds of homebuyers (64%) say they shopped around with multiple mortgage lenders to seek a lower mortgage rate, and that can pay off. Freddie Mac research shows that when mortgage rates are higher, buyers can save more than $1,200 annually by getting at least four rate quotes. Here are a few rate-shopping tips:
Prioritize Finding a House That Makes You Happy
If you’ve heard that you can “buy now and refinance later,” you may have also heard the phrase “marry the house, date the rate.” Put simply, remember that buying a home is a long-term commitment. Don’t get tunnel vision trying to time the market. Your mortgage rate can influence your monthly payments (and even how much house you can afford), but it’s out of your control, and it’s not the reason why you’re buying a house.
Instead, focus on factors within your control, like finding somewhere you’ll be happy living for years to come. Over a third of survey respondents (35%) describe the home they bought as their “forever home.” But even for the 44% who say they bought a “starter home,” it’s still a home where life is lived – until it’s possible to sell or upgrade.
