Should you lock in a mortgage rate before the next Fed meeting? Experts explain how to ease interest rate misery

By James On Oct 8, 2023

Homebuyers may be better off locking in a mortgage rate now amid the strong possibility that interest rates will rise further this year, experts warn.

The Federal Reserve kept interest rates steady at its meeting last month – keeping benchmark borrowing costs between 5.25 and 5.5 percent.

But economists are becoming increasingly convinced that the central bank will raise rates by a quarter of a percentage point before the end of the year in an effort to curb inflation – and rates are likely to remain high for some time after that.

While the Fed does not directly dictate mortgage rates, its actions influence the real estate market.

The average 30-year fixed-rate mortgage rose to 7.49 percent, according to the latest data from lender Freddie Mac. But it could rise even higher in the coming months – so it might be wise to get in sooner rather than later.

The average 30-year fixed-rate mortgage rose to 7.49 percent, according to the latest data from lender Freddie Mac

Volatile mortgage rates have been one of the most talked about effects of economic turmoil since the Fed began raising interest rates in March 2022.

Trades on a 30-year fixed-rate bond are not linked to the Fed’s funds rate, but to the yield on 10-year Treasury bonds.

Such returns are affected by inflation, Fed actions and the reaction of investors.

Financial expert Andrew Lokenauth told DailyMail.com: ‘If you want to buy, you have to include a fixed rate now.

‘The way the Fed is moving and raising their rates, it’s going to trickle down to consumers.

“I think interest rates are going to continue to rise this year and maybe next year – and then maybe level off in 2025.”

He advised that Americans should consider their options. ‘If you close a deal today and rates drop, you can always refinance. And if rates go up, you’ve snagged a good deal and you look like a genius.’

There are plenty of online tools that will tell you when your break-even point is and when refinancing would make sense, he added, since you’d have to pay a fee to do so.

“If refinancing will save you money in the first year or two, you should do it,” he said.

Lokenauth, founder of TheFinanceNewsletter.comwarns that homebuyers should never get an adjustable rate because if prices go up, you’re going to pay more and you may not have it in your budget.

“A fixed rate is the best thing to do because you can budget for it,” he said.

Financial expert Andrew Lokenauth told DailyMail.com: ‘If you want to buy, now you have to include a fixed rate’

A widespread shortage of homes for sale is also likely to help keep mortgage rates higher for longer, Lokenauth said.

Homeowners stuck in cheap mortgages of 2 or 3 percent are deterred from selling, which limits the supply of housing and in turn pushes up property prices.

Pending home sales are down 13 percent from a year ago, according to the real estate company Redfinand the total number of home sales is down 16 percent year-over-year through September.

Jeff Scott, surname First Option Mortgage in Atlanta, Georgia, said the “massive supply and demand issue” is a reason for homebuyers to lock in at the current rate — and they may have more leverage when negotiating a deal.

“There are far more buyers than sellers in the current market,” he told DailyMail.

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com. ‘This causes sellers to offer more concessions to buyers so that they can buy down rates.’

Buying out involves a seller agreeing to pay a lump sum of money which is then used to lower a buyer’s interest rate over a set period of time – and it can shave thousands off their loan repayments.

“With several clients, we’ve offered what’s called a 2/1 buyout,” he said.

“What it does is buy the interest rate down by two points in year one, and down one point in year two, before going to the note rate in year three.

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This takes the stress of a high monthly payment for two years off the buyer.

‘As inflation cools and rates fall, the buyer can then refinance below the lower note rate without missing out on what is still very strong appreciation.’

Scott said the concession has become a “saviour” for many people in the current environment.

‘They have become extremely popular because it means the home buyer can buy more time.

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‘

The seller also benefits, he added, as they are able to get the sale through as we head into what could be a tough winter ahead.

What is a mortgage rate buydown?

Buyouts involve a seller agreeing to pay a lump sum of money which is then used to lower a buyer’s interest rate over a set period of time.

It may be cheaper for them to agree to this type of transaction than to lower the price of their property.

The cost of the sale is covered by the seller’s profit on the house sale and transactions are divided into two types: permanent and temporary.

Temporary buybacks – which are much more common – see sellers pay to lower the mortgage rate in the first year or two after the sale. After that, the homeowner is responsible for the full rate.

However, a permanent buyback – much more profitable for the buyer but more expensive for the seller – is when the rate is lowered for the entire mortgage.

Common ways to structure the deal are in three-year, two-year and one-year buyouts.

In the industry they are referred to as: 3-2-1, 2-1 and 1-0 transactions.

In a 3-2-1, the rate is greatly reduced for the first year, partially reduced for the second and third years, and then returns to the original rate in the fourth year.

For example, a buyer can secure a mortgage with a rate of 6 percent and a down payment of 3-2-1.

In the first year, they may only pay 3 percent on their mortgage before it increases to 4 percent in the second year and to 5 percent in the third year.

By the fourth year, the bond will then return to the original six percent rate.

A 2-1 buyout is similar, but spread over just two years.

Thus, at a rate of six percent, a buyer can pay 4 percent for the first year and five percent in the second year.

They will then return to paying the full six percent in the third year and until the end of their mortgage – unless they refinance.

Smith says he recently negotiated a 2-1 trade-in with a client that saved the buyers $12,000 over two years.