Mortgage rates have been prohibitively high for some prospective homebuyers who gawk at their estimated monthly payments. To make the idea of homeownership palatable, many recent homebuyers have been reassured that they could buy now and refinance later to a lower rate after the Federal Reserve cuts rates, according to a U.S. News survey.
However, “buy now, refi later” comes with its fair share of risks — and by the way, the Fed doesn’t set mortgage rates.
Between Sept. 3 and 16, U.S. News ran a nationwide survey of 1,292 Americans who bought a home in the past year using a mortgage, conducted through PureSpectrum. We asked respondents questions about their homebuying experience, their expectations for refinancing to a lower rate and their opinions on how politics should shape economic policy. Here’s what we found:
— About three-quarters of recent homebuyers (74%) were told they could “buy now and refinance later” to a lower rate, most commonly by their mortgage lender/loan officer (50%) or their real estate agent (39%). The same number (74%) plan on refinancing to a lower rate in the future, while 19% do not and 7% say they’ve already refinanced.
— Forty percent of recent buyers would like to see rates fall below 5.5% to refinance, but many others have unrealistic expectations. Nearly a third (30%) would like to see rates below 5%, and 15% would like to see rates below 4.5% before refinancing. Rates on 30-year mortgages aren’t expected to fall into the 4% range within the next few years.
— Many of those who bought a home in the past year are having doubts, especially first-time homebuyers. Over half of first-time buyers (51%) regret buying a home while mortgage rates were high, compared with 30% of repeat homebuyers and 43% of buyers overall. First-time buyers are also more likely to feel trapped by their monthly payments.
— The vast majority of recent homebuyers (83%) believe that the Fed has kept interest rates high for too long. However, more than half (55%) believe that the Fed sets mortgage rates, which isn’t true. Fed policymakers set the federal funds rate, which is an overnight financing rate and has a minimal downstream impact on long-term mortgage rates.
— Two-thirds (65%) agree that the president should have more control over the Federal Reserve’s policy decisions, including 34% who strongly agree. Additionally, 46% think that President Donald Trump should be permitted to fire Fed Chair Jerome Powell, compared with 34% who say he shouldn’t and 19% who answered “I don’t know.”
[SEE: Current Mortgage Refinance Rates]
Going On 3 Years, ‘Buy Now, Refi Later’ Seems Like an Empty Promise
This is the third year that U.S. News has conducted its annual Mortgage Refinance Survey. And for the third year, the majority of recent homebuyers (74%) have been banking on the assumption that they could buy a house at today’s mortgage rates and refinance to a lower rate in the future.
Since the survey began, however, rates haven’t fallen as much as homebuyers would like. In September 2023, when we first surveyed recent buyers, 30-year mortgage rates were above 7%. Mortgage rates soon rose to nearly 8%, then fell to just above 6% by September 2024 in time for the second annual survey. Then, rates rose to 7% again, before settling in the low 6% range for the survey’s third year.
While there has been a net decrease in mortgage rates in recent years, there is no discernible, steady pattern — only volatility. It’s incredibly difficult to predict the path forward for mortgage rates, as any forecaster will tell you. And while many homebuyers that we survey had been waiting for rates to fall below 6%, that didn’t happen at all in 2023 or 2024.
In this year’s survey, 40% of recent homebuyers would like to see rates fall below 5.5% to refinance their mortgage, which isn’t out of the realm of possibility in the next few years. However, 30% would like to see rates fall below 5%, and 15% would like to see rates below 4.5%. Mortgage rates aren’t likely to fall to those levels in 2025, 2026 or 2027.
Some respondents have unrealistic expectations for when they think they’ll be able to refinance. More than half (53%) believe they’ll be able to refinance within the next year, including 18% who think they’ll be able to refinance in less than six months. In reality, many will need to wait much longer — especially for those who want to see mortgage rates in the 4% range.
Homebuyers who plan to refinance in the future should note that refinancing costs money, too. To determine how much rates would need to fall to refinance, calculate the break-even point, which is the amount of time it takes for the interest savings of a refinance to offset the closing costs — typically 2% to 5% of the loan amount.
Here’s an example: Let’s say you took out a $300,000 mortgage at a 6.5% rate. By refinancing to a 5.5% rate, you could save $193 per month on your mortgage payment. If you paid $9,000 in closing costs, it would take you nearly four years, or 47 months, for the interest savings to offset the cost to refinance. You can use a mortgage calculator to calculate the numbers for your situation.
This translates to some actionable advice for today’s homebuyers: Don’t bank on the promise of “buy now, refi later.” Yes, mortgage rates are expected to decline somewhat over the next several years, but set realistic expectations. Most importantly, if you’re buying a house, make sure you can afford the monthly payments as they are, without relying on a future refinance.
Homebuyers Face Financial Uncertainty, Especially First-Timers
The housing market has been unforgiving in recent years. Between high home prices and elevated mortgage rates, housing affordability is at its lowest point since the 1980s.
Despite the challenges, millions of Americans still bought homes within the last year. While most of them are faring well, many are second-guessing their decisions — especially first-time homebuyers. Here’s how those doubts break down among those who bought their first home and those who have bought a home before:
— 43% of respondents regret purchasing a home when mortgage rates were high, including 51% of first-time homebuyers and 30% of repeat homebuyers.
— 41% feel trapped by their current mortgage rate or monthly payment, including 47% of first-time buyers and 31% of repeat buyers.
— 7% won’t be able to keep making their payments if they can’t refinance, including 9% of first-time buyers and 5% of repeat buyers.
This is a common theme in previous iterations of this survey. For the past three years, repeat homebuyers have been more confident in their decisions than first-time homebuyers.
It’s not difficult to imagine why the stress of homebuying varies by experience. Repeat buyers are simply more experienced with buying and owning a home than first-time buyers. Also, whereas first-time homebuyers have only dealt with current market conditions, repeat buyers may have experienced their own tough markets: Some may have owned through the 2008 housing crisis, and others may have bought a home in the ’80s when mortgage rates were in the double-digits.
No matter what the housing market is like, everyone needs somewhere to live. When you look at homebuying as finding a place to put down roots rather than a high-stakes investment, it becomes far less stressful. Trying to “time the market” and find the best moment to buy a home is a fool’s errand, especially considering misconceptions consumers often have about how the housing market and greater economy intersect.
Respondents Misunderstand the Fed’s Role in Real Estate
Federal Reserve policymakers vote to cut or raise the federal funds rate. While mortgage lenders tend to factor in the Fed’s policy decisions, there’s not a direct relationship between long-term mortgage rates and the short-term federal funds rate. In fact, mortgage rates increased after the Fed cut rates in September 2024.
However, most recent homebuyers (55%) think that the Federal Reserve sets mortgage rates, which isn’t true. Fed Chair Jerome Powell has set the record straight in multiple press conferences, directly telling reporters “we don’t set mortgage rates” after the July and September Fed meetings.
It’s no wonder that 83% of recent homebuyers think that the Fed has kept interest rates high for too long. Most of them believe that the central bank is to blame for today’s high mortgage rates.
Mortgage rates fluctuate for a number of reasons, more closely tracking the yield on 10-year Treasury bonds than the federal funds rate. Bond yields, and thus mortgage rates, tend to be higher when the economy is strong and lower when the economy shows signs of weakness.
For consumers who have been feeling the pressure of high interest rates, it’s easy to oversimplify the relationship between the Fed and mortgage rates. And many have looked to Trump for help as he puts pressure on central bank policymakers to lower the benchmark rate.
Two-thirds of respondents (65%) agree that the president should have more control over the Federal Reserve’s policy decisions, compared with 17% who disagree. Nearly half (46%) think that Trump should be permitted to fire Fed Chair Powell, while 34% say he should not.
[Read: Best Mortgage Refinance Lenders.]
The Fed operates as a politically independent entity within the government. It’s not accountable to the executive branch — instead, it has a dual mandate of maintaining maximum employment and stable price growth for the public good. In other words, it’s the Fed’s job to strike a balance between job growth and inflation so consumers can prosper.
If central bank policymakers are beholden to the president, then the president could demand lower interest rates to boost his own popularity even if it isn’t the right decision for the greater economy. As the Fed puts it, independence ensures its motives aren’t “subject to political pressures that could lead to undesirable outcomes.”
This is exactly what happened when former President Richard Nixon not-so-subtly pressured the Fed to lower rates in the early 1970s, only for inflation to run rampant for the remainder of the decade. Homebuyers may do well to learn from history rather than repeat it and live through another era of endless price hikes.
More from U.S. News
Buy Now, Refi Later: 84% of Recent Homebuyers Plan on Refinancing
Burned by High Rates, 54% of Homebuyers Say Fed Is ‘Politically Motivated’
The Fed Cut Rates. Will Mortgage Rates Follow Suit?
Survey: Homebuyers Pin Refinance Hopes on Fed Rate Cuts originally appeared on usnews.com
