Homeowners are falling into the ‘buy now, refi later’ trap—it’s going to cost them

Americans who were able to stomach higher mortgage rates to buy a home in the past year were told they had a trick up their sleeve—they could always refinance later at much lower rates.

As it turns out, many of them took the bait.

According to a nationwide survey by U.S. News, 82% of recent homebuyers were assured by their mortgage agents or real estate brokers that they could “buy now and refinance later.” The overwhelming majority (84%) indicated they plan on refinancing at a lower rate in the future.

Mortgage rates peaked just below 8% in October, the highest in more than two decades, according to Freddie Mac.

While that’s right around the historical average of 7.7% since 1971, it’s more than double the lows seen during the pandemic, when buyers were able to lock in rates below 3% in some cases.

That probably explains why 55% of buyers in the U.S. News survey regretted taking on a mortgage last year, while 78% said they were at least “somewhat” stressed about elevated rates. Nearly all (93%) said they tried to obtain the lowest possible rate they could before closing.

That they ended up closing anyway shows that “buy now, refi later” was a good marketing tactic by the real estate industry. But the problem is there’s no guarantee that it’ll work.

In the meantime, at least one in ten recent buyers (13%) said they won’t be able to keep making payments without a lower refinance rate. It won’t be long before some of them regret their decision to buy last year.

Living in regret

Last year, the real estate industry experienced its worst downturn of a generation as home sales slowed to a crawl amid surging rates and low housing inventory. So brokers, lenders, and real estate agents had to get creative by offering “buy now, refi later” programs.

As Creditnews reported, some lenders offered a free refinancing program within 24 months of purchasing a home. Others provided a payment protection plan that waived any refinance fee over a certain period.

These offers were meant to lessen the blow of taking on a 7% mortgage when nearly two-thirds of the country had rates below 4%.

These programs all capitalized on buyers’ hope that mortgage rates will decline sharply in the near future. Unfortunately, the prospect of refinancing at lower rates isn’t as much of a lock as lenders suggested.

According to Goldman Sachs, mortgage rates are expected to remain above 7% for the entirety of 2024 and will only decline modestly the following year. The investment bank forecasts an average 30-year rate of 7.1% this year and 6.6% at the end of 2025.

The National Association of Realtors (NAR) tends to agree and is forecasting rates to hover between 6% and 7% for most of the year.

“[M]ortgage rates remain high as the market contends with the pressure of sticky inflation,” according to Sam Khater, Freddie Mac’s chief economist. “In this environment, there is a good possibility that rates will stay higher for a longer period of time.”

If inflation remains as “sticky” as Khater suggests, it paints an even worse picture for the “buy now, refi later” crowd.

Is inflation making a comeback?

With inflation showing signs of re-heating, the prospects of fast and furious rate cuts by the Fed have diminished. U.S. CPI grew at an annual rate of 3.2% in February, higher than expected and still a ways off the Fed’s 2% target.

A few months ago, markets had placed big bets that the Fed would start cutting rates in March, but those odds have since fallen to 1%. While rate cuts are still expected this year, it’s not a slam dunk like many believed.

How the Fed responds to inflation could have a major impact on mortgage rates, since the federal funds rate directly and indirectly affects all sorts of consumer credit. That’s why economists are cautious about calling for lower mortgage rates this year.

“The budget deficit remains high, and the various inflation metrics remain above the comfort level,” said NAR chief economist Lawrence Yun, commenting on the path of mortgage rates.

“The Fed’s likely decision to cut rates in 2024 would be a key factor that could breathe new life into the housing market. However, it’s important to note that significant drops in mortgage rates might not happen in the early months of 2024. If any reductions occur, they are likely to be gradual, possibly beginning in the latter part of the year,” explained Bank of America’s head of retail lending, Matt Vernon.

That means even if mortgage rates were to decline, the pace would be so gradual and uneven that refinancing might not make sense.

About one-fifth of respondents in the U.S. News survey said they wanted to refinance when rates fall below 5%. Around four in ten would be happy to refinance at between 5.5% and 6%.