‘We can expect mortgage rates to fall’

Homebuyers can finally take a break this year, one expert says, as signs of declining inflation could lower mortgage rates as early as this month.

“Mortgage rates are down nearly a full percentage point since they peaked in November,” Melissa Cohn, vice president of real estate brokerage firm William Raveis, told Yahoo Finance Live (video above). “I think we can expect mortgage rates to fall another quarter or even half a percent over the course of next month.”

Average interest rates on 30-year mortgages have fallen by three-quarters of a percentage point since mid-November, according to Freddie Mac, to 6.33% this week. The drop in rates comes after a series of government reports showed signs that inflation in the US was finally cooling down.

For some buyers, falling mortgage rates means regaining purchasing power and re-entering the market.

“It’s early 2023. Everyone is back to zero in terms of achieving their goals and everyone needs to get loans,” Cohn said. “Banks are going to sharpen their pencils, they’re going to tighten their margins and do what they can to bring in volume and lower rates will bring in more real estate transactions.”

Rates do not drop to 3%

After about two years of historically low mortgage rates, 30-year rates rose last year at the fastest clip in more than 50 years. Most of the rate hikes resulted from the Federal Reserve’s diligent battle against the rampant rise in consumer prices.

However, signs of cooling inflation in recent months raise the likelihood that the Fed will reconsider the pace of hikes, providing some relief for mortgage rates. This week, new data showed the decline had fallen to its lowest level in more than a year.

Still, rates are unlikely to return to levels seen in the early years of the pandemic.

“People can’t expect us to go back to a flat rate of 3%, 30 years,” Cohn said. “That has now happened because of COVID and the pandemic, and we don’t want to be in that position again. If we can get interest rates back to where they were pre-COVID, call that somewhere between 3.75% and 4.5%, that would be a home run.”

LOS ANGELES, CALIFORNIA - DECEMBER 19: A sign is posted for new condos for sale on December 19, 2022 in Los Angeles, California.  The National Association of Realtors will release its November existing home sales data later this week, after existing home sales fell 28 percent in October from a year earlier.  (Photo by Mario Tama/Getty Images)

There is a sign for new condos for sale December 19, 2022 in Los Angeles, California. The National Association of Realtors will release its November existing home sales data later this week, after existing home sales fell 28 percent in October from a year earlier. (Photo by Mario Tama/Getty Images)

How do you get the best interest

The combination of higher rates, rising house prices and inflation was a huge blow to many first-time buyers last year, who were often priced out of the market.

While a rate drop can significantly increase your purchasing power, there are other ways you can increase your chances of getting a lower rate. According to Cohn, the key is to start early by improving your credit score.

“Many of the better rate banks will want someone to have three to four different active lines of business in their credit history,” she said, noting that buyers should have enough money for the down payment plus extras. “We find that many first-time homebuyers get stuck because they may have enough money for the down payment, but haven’t factored in all the closing costs and what you need for reserves.”

Another way to lower your rate is to consider a variable rate mortgage or government-backed home loan, which often have lower interest rates and may be more accessible.

Finally, keep an eye on the demand in your area. Sellers are more open to offering incentives such as buying off mortgage interest deductions, cash for closing costs, and even price reductions, so buyers still in the market should grab those opportunities while they still can.

“When mortgage rates are higher, real estate prices are usually a little bit softer,” Cohn said. “If interest rates fall, real estate prices will rise again and there will be more competition for the homes on the market.”

Gabriella is a personal financial reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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