27% of 2023 Home Buyers Plan to Refinance Once Mortgage Rates Drop. But How Long Will They Have to Wait?

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KEY POINTS

  • The good thing about mortgages is that they can be refinanced when interest rates drop.
  • Today's rates may be here to stay a while, so make sure you can afford your home based on current borrowing rates.

To say that today's housing market is a tough one for first-time home buyers would be an understatement. Not only is housing inventory low, but mortgage rates are elevated at a time when home prices are still pretty high. That's a very costly combination.

Now, the good news is that today's first-time buyers aren't necessarily letting current housing market conditions get them down. Many are still making plans to buy a home this year. But they're also planning to refinance their mortgages once rates come down. 

In fact, 27% of 2023 buyers are gearing up to refinance after purchasing their homes, according to TD Bank's First-Time Homebuyer Pulse. But while that's a good plan in theory, it may not come to pass for quite some time.

Mortgage rates may not fall anytime soon

It's definitely a good idea to plan to refinance your mortgage loan once borrowing rates drop across the board. And you should especially make an effort to maintain a great credit score so you're able to qualify for a competitive rate once refinancing your mortgage makes sense.

But if you're going to buy a home today with the plan to refinance your mortgage as soon as you can, know this -- you may be stuck with your current mortgage rate for quite some time. 

Mortgage rates have been stuck in the 6% range for 30-year loans since the start of the year. And based on general market and economic conditions, it's not unreasonable to assume that mortgage rates could easily stay where they are not just for the remainder of 2023, but also beyond.

That's why if you're going to buy a home today, you'll need to really crunch the numbers and make sure you can swing your monthly costs based on the mortgage rate you're locking in initially. If today's rates make buying a home a stretch, then you may want to put your plans to purchase one on hold. 

Will mortgage rates ever get down to 3% again?

Historically speaking, today's mortgage rates actually aren't so high. Rather, it's that buyers got used to the record low rates that became available earlier in the pandemic. 

In 2021, it was more than feasible to sign a 30-year mortgage at or around 3% if you had great credit. These days, you might be looking at more than double that rate, even if your credit is excellent.

There's a good chance that mortgage rates will drop over time. But whether we'll see 3% rates anytime soon is questionable. Those rates aren't very profitable for lenders, so chances are, we'll only see them on offer if the housing market takes a dive and lenders grow increasingly desperate to drum up business.

But that said, if you sign a mortgage today in the 6% range and rates drop to the low 5% range or upper 4% range a few years from now, refinancing could result in a world of savings. So while you shouldn't bank on a refinance to be able to afford your home, you can always pursue a refinance once it makes sense to get a new mortgage.

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