Marry the house, and date the rate" means committing to a home for the long-term but refinancing the interest rate when it drops. This phrase gained popularity when mortgage rates rose to 20-year highs in 2022.
The Federal Reserve has kept interest rates low since the Great Recession to stimulate the economy, which resulted in significant inflation. High inflation is one of the reasons for soaring home prices.
Refinancing a home loan costs around 3.5%, so homeowners need to be in their home for almost 7 years before breaking even on their refinance. Homeowners should consider the possibility that interest rates may not substantially decline for years, possibly even decades, and carefully evaluate whether it's worth refinancing or not.
The phrase “Marry the house, and date the rate” has gained significant popularity since the Spring of 2022, when mortgage rates rose to 20-year highs. The phrase simply means that a home buyer should commit to a long-term relationship with the home they love, but they refinance the interest rate when rates drop. While real estate agents and lenders often promote this phrase, is it a good idea?
Since the Great Recession in 2008, the Federal Reserve has kept interest rates low to stimulate the economy. They have achieved this by making money cheap to borrow. Unfortunately, this resulted in significant inflation. The cheaper it is to borrow money, the more people spend, and the more they’re willing or forced to pay for goods. Inflation is part of the reason why home prices are so high. In August 2022, inflation in the U.S. was running 8.3%, the highest since 1981. At that time, the Federal Reserve was fighting inflation that had reached a peak of 13.55%. The government’s primary tool for controlling inflation is manipulating interest rates. Therefore, it is essential to explore the history of mortgage rates and inflation at the same time.
In 1980, inflation had become a runaway freight train, and to control it, the Federal Reserve raised interest rates to over 15%. It took until 1989, and two recessions, before interest rates dropped back down to 9%, a full ten years. Sometimes, interest rates drop much faster. In June of 2000, it took just under 18 months for interest rates to drop from 8.09% to 6.56% in November of the following year. This was primarily because inflation dropped from 3.7% to 1.9% during this same period.
So, when will interest rates go down? That is obviously an unknown. If history is any indicator, inflation will have to drop below the Federal Reserve’s goal of 2% before they lower interest rates significantly, especially if we’re hoping for interest rates to be as low as they have been for the past 20 years. However, given the current inflation rate, it is likely that interest rates will only go higher for the next year or longer.
Assuming a buyer does not have a prepayment clause in their mortgage, they can refinance anytime after their purchase. However, refinancing a home loan costs around 3.5%, so for a $500,000 loan, it will cost you $17,000 between points and fees. If a homeowner were to refinance from a 7% loan to a 6% loan, it would save them $417 a month in interest. That’s a significant monthly savings for most households. However, it would take three and a half years ($17,000 refi costs / 417 savings = 42 months) before their savings would pay the refinance costs. Therefore, a homeowner would need to be in their home for almost 7 years (three years plus 42 months) before breaking even on their refinance.
The general rule of thumb is that a homeowner wants at least a one percent lower interest rate before refinancing. Of course, the greater the interest rate drop, the shorter the time it takes to break even on refinancing costs. Whether it is worth it or not depends on how long a homeowner realistically plans on living in the home. On average, the typical homeowner buys a different home after just 10-13 years, according to the National Association of Realtors.
If your real estate agent says "Marry the house, date the rate" consider the very real possibility that they are uninformed about the potential for substantial interest rate declines and mostly motivated by the juicy commission on the line. They are not acting as a fiduciary or acknowledging the very real possibility that rates may not substantially decline for years, possibly even decades. Use EffectiveAgents.com to Discover a reputable and client-oriented real estate agent who prioritizes your individual requirements rather than solely focusing on closing a deal.