How Much Will Home Affordability Improve? – Forbes Advisor – Technologist

After two and a half years of interest rate hikes and pauses aimed at curbing inflation, the Federal Reserve slashed its benchmark federal funds rate by 50 basis points during its September policy meeting—the first cut in over four years. A basis point is one one-hundredth of a percentage point.

Fixed mortgage rates are indirectly tied to the Fed’s rate, so when the Fed began hiking its rate in March 2022, mortgage rates surged, although rates have gradually eased since peaking in October 2023.

One big question is whether this initial jumbo-sized Fed rate cut and future cuts will enable buyers hampered by affordability obstacles to get on a pathway to homeownership.

What Home Buyers Should Know About the Latest Fed Rate Changes

Although the Fed’s decision to chop a half-point off its key policy rate was a welcome move, experts say would-be buyers will unlikely see meaningful signs of affordability soon.

“The challenging thing for mortgage rates is that we’ve likely already seen a lot of that move be priced in,” Danielle Hale, chief economist at Realtor.com, tells Forbes Advisor.

Nonetheless, Hale notes that rates have nosedived by more than 1.5% since their peak nearly a year ago, significantly boosting home buyers’ purchasing power.

For instance, buyers can now purchase a house similar in price to when mortgage rates were higher, but they’ll see around $300 monthly payment savings, according to Realtor.com analysis. Alternatively, Hale says buyers can use the roughly $70,000 in additional purchasing power the lower rates afford to buy a more expensive home.

Should You Buy Now or Wait for More Rate Cuts?

Although the Fed signaled more rate cuts are in store, experts typically caution against banking on continuous mortgage rate decreases, deeming this a risky home-buying strategy.

“If you find a house at the right price, it’s always the right time to buy,” Melissa Cohn, regional vice president at William Raveis Mortgage, tells Forbes Advisor.

Cohn also warns against holding out for lower mortgage rates as a surge of returning buyers could drive home prices higher.

“Is that extra one percent of mortgage rate, let’s call it for a year, going to be more or less than the increased price of the house in a year?” Cohn says.

Hale says another good reason for buyers to make a move now is the “strong likelihood” that the market has already priced in the remainder of 2024’s projected rate cuts.

Hale also notes that house-hunting competition tends to dip in the fall, giving buyers more bargaining power when negotiating with sellers.

11 Expert Strategies To Optimize Home Affordability

If you can’t hop on the home-buying train just yet, Hale and Cohn offer practical tips to help you score the best rate and home price when you’re ready to take the leap.

For instance, if you qualify for an FHA 203(k) loan, consider buying a fixer-upper in your price range that needs repairs or updates rather than a more expensive home.

Here are 11 expert home-buying hacks:

1. Set and test your budget: “[U]se affordability calculators, which are based on typical rules of thumb and mortgage qualification ratios to set a budget. But then you want to test that budget for yourself. Maybe you spend more on childcare than the typical household, and so maybe you don’t want to spend as much on your monthly mortgage payment because that might not be as comfortable.” – Hale
2. Improve your debt-to-income ratio: “You can adjust [your debt-to-income ratio] either by bumping up your income or by paying down existing debt, and that will tend to mean a lower mortgage rate.” – Hale
3. Reduce your loan-to-value ratio: “Try to adjust your loan-to-value ratio either by putting a larger down payment down for a home or maybe shrinking the price of the home that you’re looking for so that your existing down payment dollars stretch further.” – Hale
4. Shop several lenders: “For buyers, the biggest tip is to shop around among lenders because that’s going to realize the biggest savings on a mortgage rate.” – Hale
5. Look for rate-lock-in opportunities: “The best thing to do, if possible, would be to find a bank that will allow you to lock your rate in at application but will also offer you a float-down option prior to closing.” – Cohn
6. Ask lenders about modifying your rate post-closing: “This is mostly for portfolio lenders that offer you the ability to close on a mortgage today and then give you the ability to modify your rate post-closing by paying a fee and not having to go through the whole expense and the energy of a refinancing.” – Cohn
7. Optimize credit score: “Make sure that you have the highest possible credit score that you can: balancing your debt against your credit cards, making sure all your payments are made on time. Good credit will help you get a better rate.” – Cohn
8. Review your cash situation: “You have to show that you not only have money for the down payment but for closing costs and any potential reserves that are required, too.” – Cohn
9. Assess your income situation: “Make sure you also have the income to qualify. If you are in a lower or moderate income level, try to see if there are any grant programs or reduced interest rate programs that may be available to you as a first-time home buyer. Most states do have first-time home buyer programs [or] grant programs if you don’t have enough money for a down payment.” – Cohn
10. Consider a co-signer: “If it’s really a question of being able to qualify … do you have a family member perhaps who could co-sign for you temporarily, and then when rates are really much lower in a year or two then to be able to refinance and take them off.” – Cohn
11. Shop properties in adjacent towns: “Look at the town next to the best, most popular town … you’ll probably end up getting a better deal. If you’re a pioneer today, in five years, you’re probably going to be in a much more gentrified area.” – Cohn

When Should Homeowners Refinance?

Now that rates are well below their peak, should homeowners refinance now or wait for rates to decline further?

“If you bought your home at the peak and your rate was at 8%, 6% looks pretty darn good today,” Cohn says.

Nonetheless, Hale says it can sometimes be challenging for homeowners to determine the best circumstances to refinance.

“Whether they should refinance now or wait is really going to depend on their risk tolerance for potentially realizing additional savings versus locking in the savings and starting to benefit from that additional cash flow now.” Hale says.

Still, Hale advises those considering refinancing to review their time horizon and weigh the expenses against potential savings. Remember, refinancing isn’t free. As with a purchase loan, the process comes with fees and closing costs.

For instance, if you plan to move in a couple of years, Hale says refinancing may not be worthwhile since the savings might not add up. However, you could reap the benefits if you plan to stay longer.

“Fortunately there are tons of refinance calculators that can help you run the math and figure out whether it makes sense for you,” Hale says.