“We can expect mortgage rates to drop”

Homebuyers may finally get a break this year as signs of lower inflation could push mortgage rates lower as early as this month, one expert says.

“Mortgage rates are down almost a full percentage point after peaking in November,” Melissa Cohn, vice president at real estate brokerage firm William Raveis, told Yahoo Finance Live (video above). “I think we can expect mortgage rates to drop another quarter or even half a percentage point over the next month.”

The average 30-year fixed mortgage rate has fallen three-quarters of a percentage point since mid-November to 6.33% this week, according to Freddie Mac. The rate cut comes after a series of government reports showed signs that US inflation is finally cooling.

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

“It’s early 2023. Everyone’s back to zero in terms of meeting their goals, and everyone’s got a loan at the door,” Cohn said. “Banks will sharpen their pencils, tighten their margins and do everything they can to drive volume through the door, and lower interest rates will bring more real estate transactions.”

Prices will not fall to 3%

After nearly two years of record low mortgage rates, the 30-year rate rose at its fastest rate in 50 years last year. Most of the interest rate hikes were due to the Federal Reserve’s zealous fight against widespread consumer price inflation.

However, signs of cooling inflation in recent months raise the possibility that the Fed will reconsider its rate hike – giving some relief to mortgage rates. New data this week showed it fell to its lowest level in more than a year.

Still, rates likely won’t return to levels seen in the early years of the pandemic.

“People can’t expect us to go back to a 3%, 30-year fixed rate,” Cohn said. “Now it happened because of COVID and the pandemic, and we don’t want to find ourselves in that situation again. If we can get interest rates back to where they were before COVID, call anywhere from 3.75% to 4.5%, that would be a home run.”

A sign is placed in front of new condominiums for sale in Los Angeles, California on December 19, 2022. The National Association of Realtors will release November data on existing home sales later this week, with October existing home sales down 28 percent from a year ago. (Photo by Mario Tama/Getty Images)

How to get the best interest rate

The combination of higher rates, climbing home prices and inflation hit many first-time buyers last year, often priced out of the market.

While interest rate cuts can significantly increase your purchasing power, there are other ways to increase your chances of landing a lower rate. According to John, the key is to start early by improving your credit score.

“A lot of the banks with the better interest rates want to see someone have three to four different active trade lines on their credit history,” he said, noting that buyers should have enough money for a down payment and a down payment. “We see a lot of first-time homebuyers get stuck because they may have enough money for a down payment, but they haven’t considered all the closing costs and what you need for deposits.”

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

Finally, pay attention to the demand in your area. Sellers are more open to offering incentives like lower mortgage rates, cash for closing costs, and even price reductions, so buyers who are still in the market should take advantage of these opportunities while they can.

“When mortgage rates are high, real estate prices tend to be a little softer,” Cohn said. “When interest rates come down … real estate prices will start to rise again and there will be more competition for homes in the market.”

Gabriella is a Personal Finance Correspondent at Yahoo Finance. Follow him on Twitter @__gabriellacruz.

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