More Buyers Would Purchase a Home if Mortgage Rates Fell to This Rate

In mid-2020, mortgage rates fell to record lows, and it led to a serious uptick in buyer demand. In fact, at one point, mortgage lenders were downright overwhelmed with applications.

But while buyer demand is still reasonably strong on a whole, it's definitely cooled over the past year. And a big reason is that mortgage rates have been stubbornly high.

Mortgage rates have been stuck in the 6% range since the start of 2023. And as of May 4, the average 30-year mortgage rate was 6.39%, according to Freddie Mac.

That rate is higher than what many buyers today want to pay -- especially with home prices still being elevated. But even a modest drop in mortgage rates might drive an increase in buyer demand -- and a notable one at that.

Is 5.5% the magic number?

Today's mortgage rates aren't actually unreasonably high, historically speaking. The problem is that many home buyers got used to the almost ridiculously low mortgage rates that were offered during the latter part of 2020 and 2021.

Back then, you could easily sign a 30-year mortgage at around 3% if you had a good credit score. Today, even excellent credit may not get you below the 6% mark for that same loan. So it's easy to see why a lot of people have held off on buying a home.

Meanwhile, a recent study by John Burns Research and Consulting, as reported by CNN, reveals that 71% of Americans are not willing to accept a mortgage rate above 5.5%. And 62% of Americans think that a "normal" mortgage rate, historically speaking, is one that's below 5.5%.

The problem, though, is that we may not see mortgages offered at 5.5% for quite some time. And that means that a lot of buyers may end up sitting out the market for an extended period of time.

Should you sign a mortgage at today's rates?

The mortgage rates we're seeing today are definitely not a bargain. But if you can afford to buy a home and keep up with housing payments on it based on today's mortgage rates and property prices, then you may want to move forward with an offer, even if it means signing a loan at a rate you're less than thrilled with.

We don't know how long it will take for mortgage rates to reach the 5.5% mark. But it could take years. And if you're in a position to buy a home now, you probably don't want to wait that long.

That said, one thing you should realize is that when you sign a mortgage, you're not necessarily guaranteed to keep the same payments forever. It's common for mortgage borrowers to refinance their home loans when rates drop.

Now again, we don't know when that's going to happen. But let's say you sign a mortgage at 6.39% today, and in two years from now, rates start dropping notably. You might, at that point, be able to refinance to a mortgage at a rate of 5.39%. For a $200,000, 30-year loan, that's $127 less per monthly payment.

You may prefer to sign a mortgage at 5.5%, rather than at the rates you're seeing today. But holding out for a rate that low could mean missing out on a key opportunity to start building equity in a place of your own sooner.