Housing Market 2023: Should You Buy Now and Refinance Later?

Happy young married couple are moving to new apartment.
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In 2020, the average 30-year fixed-rate conventional mortgage had an average interest rate of just 3.22%. Currently, that same mortgage has an average rate of around 6.98%. On a standard mortgage loan, this could mean a difference of tens of thousands of dollars or even more.

With mortgage interest rates in seemingly constant fluctuation and the cost of homes higher than ever, many people are starting to wonder if real estate is still a good investment in 2023. For some, the idea of securing a home now and refinancing it later — ideally for a lower rate — might seem like the best option. Others are waiting and hoping that rates or home values will drop enough soon to make real estate a lucrative investment.

If you’re on the fence about purchasing property, here are some things to consider.

Mortgage Rates Change Over Time

“Today’s rates are actually not all that high when we compare [them] to the 1980s,” said Sebastian Jania, owner of Ontario Property Buyers. In fact, in 1981 the average mortgage interest rate was 16.63%.

But rates change on a near daily basis — sometimes even multiple times a day. So, while you may be able to refinance your mortgage in the future, you shouldn’t necessarily purchase a home with that as the end goal.

“I don’t think anybody should be buying with the expectation to refinance at lower rates,” added Jania. “Lower rates may come in the future, but ultimately nobody knows when that will happen until it happens.”

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Investors May Want To Look at Real Estate Differently

“The average consumer sees the rising interest rates and thinks, ‘Hunker down, it’s not the time to buy.’ They’d be right, if what they’re buying is just overhead — a depreciating asset with a lot of interest fees upfront,” said Dallas Waldon, managing partner at Land Boss.

But if you’re coming at it from an investor’s side, this might not apply to you in the same way.

“As an investor, you need to approach the purchase of real estate from a different perspective,” added Waldon. “No matter what the interest rates are, is the asset you’re buying below market value? That means market value at the time that you’re buying it. You can refinance later, or sell to someone who will refinance later, but the key is to make sure that you aren’t overpaying up front.”

Over-Leveraging a Property Can Be Detrimental to Cash Flow

“It’s really important for one to always be sure they are not over-leveraging a property,” said Jania. “What we’ve seen more recently is that people are buying properties, refinancing them at 80% [loan-to-value] LTV, and then having a very difficult time cash flowing them because they are maximally leveraging the properties. However, by buying right and not maximizing the LTV, one can be in a little bit of a safer position when investing in real estate now.”

Real Estate Can Be a Safe Investment If You’re Financially Prepared

It’s easy to see why so many people want to buy residential real estate. For many, the thought of owning a home is the dream. It’s a way to put down some roots, build a home for a family, or even have an asset to fall back on in the future.

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But you may want to wait on purchasing property if you’re not financially prepared. This means having a sizable down payment and getting all of your other financial ducks in a row.

“You are ready to buy a house when you are completely out of debt, have a fully funded emergency fund, and 20% to put down. If you don’t have all of that, keep working to hit those goals, then work on buying a house,” said Jay Zigmont, PhD, CFP, founder of Childfree Wealth.

It’s important to remember that while you can qualify for a mortgage with a smaller down payment — sometimes as low as 3% or 3.5% — this might cost you in the long run.

“The challenge is that if you buy a house with 3.5% down (or less), you are underwater the day you buy the house,” said Zigmont. “It costs about 6% to sell a house, so you are counting on prices going up, which they do not always do.”

Of course, if you plan to stay in your home for a long time and end up refinancing it for a lower rate, this could still be a good investment. Just consider your financial situation and goals before deciding what to do.

Buy Only If the Price Is Right

“When investing in real estate, the purchase price and the mortgage rate are the two main factors to consider. They’re both important, but the purchase price is the factor that you can’t alter down the road,” said Scott Lieberman, founder of TouchdownMoney. “The mortgage rate can be renegotiated later on, hopefully when interest rates drop across the board. So, if you see a price you really like for a property, I’d take it. Because the mortgage rates will hopefully decrease in the future, but that property might never be so cheap again.”

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But there’s a caveat to this, Lieberman added. “You should only take the ‘buy now, renegotiate later’ approach if you’re sure you’d be able to pay the mortgage even if the rate were to stay the same. You can hope mortgage rates drop, but you can’t count on it. If you doubt your ability to pay the current mortgage rate for the duration of the mortgage, it’s better to play it safe and wait.”

The Term ‘Safe Investment’ Is Subjective

“The term ‘safe’ is very subjective,” said Jania. “The degree to which something is ‘safe’ is going to be dependent on the individual’s experience, access to resources, network, and more. One can most definitely lose a lot of money in real estate if they do not have any of the aforementioned things. If one does have these things and can strategically manage an uncertain environment, then one can definitely make tremendous returns with real estate.”

Evaluate your risk tolerance and take some time to carefully consider whether now’s the right time to buy property. The housing market is constantly changing, so if you’re not sure, you may want to wait for a while. In the meantime, keep saving up for a down payment, pay down outstanding debts, and keep an eye on current mortgage rates.

Whether you refinance later or not, it’s still important to make sure you’re as fully prepared as possible before making such a major financial decision.

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