Should Retirees Lock In Today's Lower Mortgage Rate or Wait for Rates to Fall Further?

If you have spent any time watching mortgage interest rates, you’ll know that they fluctuate. Many have been hoping they would fall significantly soon in order to permit cheaper mortgages and to make refinancings worthwhile.

You might wonder, though, whether you should take action when rates drop some — or if it’s better to wait, hoping for a lower rate. This can be a particularly pressing question when you’re approaching or in retirement.

There’s no single answer that will serve everyone equally well. But let’s look at the issue and some considerations.

Mortgage interest rates in context

Recent headlines have reflected rates rising — a bit. For example, as of March 19, the overall mortgage rate for 30-year fixed-rate loans popped up to 6.22% from 6.11% a week earlier, per Freddie Mac. (Freddie Mac is a government-sponsored enterprise that buys mortgages from lenders. Doing so enables them to use that money for new loans and supports the U.S. housing market.)

But look further back, and you’ll see that Freddie Mac has also reported that the 6.22% rate is “nearly half a percentage point lower than the same time last year.” So longer term, rates are down.

For 15-year fixed-rate loans, the recent average rate of 5.54% is up a bit from last week’s 5.5%, but down more meaningfully from 5.83% a year earlier.

A quick review of mortgages

It’s worth taking a moment to review mortgage basics. They come in two key forms: fixed-rate mortgages and adjustable-rate mortgages (ARMs). A fixed-rate loan will feature the same interest rate over the life of the loan. An ARM will generally offer a fixed rate for the first few years (often five, seven, or 10 years), and then it will regularly adjust that rate according to what interest rates are doing.

Note that while most people take out 30-year loans, 15-year loans are also available, usually featuring higher monthly payments but much less total interest paid. Other terms also exist, such as 20-year loans.

With a seven-year ARM, you’re locking in a rate for the first seven years, and it will often be a lower rate than a 30-year fixed-rate loan offers. If you only plan to be in the home for a few years, this is a good option. It can also be good if you’re sure that interest rates will fall significantly in the coming years, because then you might refinance. But if you plan to remain in the home for decades, an ARM can be risky, because if interest rates keep rising, so will your mortgage rate — and that can be costly.

What should you do?

So let’s assume you’re looking at current interest rates and wondering whether you should lock them in now or wait for lower ones. Here are some considerations:

• Locking a rate in now offers a degree of certainty, especially with a fixed-rate loan. You’ll know what your monthly payment will be for the life of the loan. If it’s for an ARM, you’ll have fixed the rate for perhaps five, seven, or 10 years. Certainty is especially valuable when you’re living on a relatively fixed income, as many retirees do.
• But rates often do fall, and many have expected them to fall further in the years ahead. So if you are risk-tolerant, you might indeed wait and see.
• Take into account our economic environment, too, because the Federal Reserve, which sets the rates that influence mortgage rates, is always taking the pulse of our economy and then acting accordingly to try to keep it chugging along as smoothly as possible.
• When inflation is high, the Fed might raise interest rates to try to cool down the economy — and vice versa. These days, inflation is rising and may rise more, given the Iran war and the rising price of oil, among other things. So interest rates may not drop much soon. In fact, the Fed met recently and decided to hold rates steady for now. Still, no one really knows where our economy and interest rates will be a month or a year from now.

It’s not clear what anyone should do, but you have multiple options. You could get a fixed-rate or adjustable-rate loan. You could borrow now, or you could wait. You could accept today’s rates and buy a less-costly home because relatively high rates mean higher monthly payments. You could aim to refinance should rates fall.

At a minimum, though, never buy more house than you can afford. Be sure that the monthly payments — or the expected ones if you have an ARM — are ones you can manage. Perhaps read our Motley Fool research report on common homebuyer regrets, in order to avoid making any of them yours.

Note, too, that you might be able to buy more of a house in a less costly region. (We have a Motley Fool research report on the best places to retire, too.)