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“We can expect mortgage interest rates to go down”

Homebuyers may finally catch a break this year, an expert says, as signs of easing inflation could lead to lower mortgage rates as early as this month.

“Mortgage rates have fallen by almost a full percentage point since they peaked in November,” Melissa Cohn, vice president of William Raveis, a real estate brokerage, told Yahoo Finance Live (video above). “I think we can expect mortgage rates to go down another quarter or even as much as half a percent over the next month.”

The average rate on the 30-year fixed mortgage has fallen by three-quarters of a percentage point since mid-November, according to Freddie Mac, reaching 6.33% this week. The drop in interest rates comes after a series of government reports showed signs that inflation in the US was finally cooling down.

For some buyers, a drop in mortgage interest rates means regaining purchasing power and re-entering the market.

“It̵[ads1]7;s the beginning of 2023. Everyone is back to zero in terms of meeting their goals, and everyone has to bring loans in the door,” Cohn said. “The banks are going to sharpen their pencils, they are going to tighten their margins and do everything they can to get volume in the door and lower prices will bring more real estate transactions.”

Prices will not drop to 3%

After roughly two years of record low mortgage rates, the 30-year rate rose last year at the fastest clip in more than 50 years. Most of the interest rate increases were due to the Federal Reserve’s eager fight against violent growth in consumer prices.

However, signs of cooling inflation in recent months increase the likelihood that the Fed will reconsider the pace of hikes – giving mortgage rates a little relief. This week, new data showed they had fallen to their lowest level in over a year.

Still, prices are unlikely to return to levels seen in the early years of the pandemic.

“People can’t expect us to go back to a 3%, 30-year fixed rate,” Cohn said. “Now that happened because of COVID and the pandemic, and we don’t want to find ourselves in that position again. If we can get interest rates back to where they were before COVID, you can call it anywhere from 3, 75% to 4.5%, that would be a home run.

“We can expect mortgage interest rates to go down”

A sign is posted in front of new condominiums for sale on December 19, 2022 in Los Angeles, California. The National Association of Realtors will release its November data on existing home sales later this week after October saw existing home sales down 28 percent from a year earlier. (Photo by Mario Tama/Getty Images)

How to get the best possible interest rate

The combination of higher prices, rising house prices and inflation was a massive blow to many first-time buyers last year, who were often priced out of the market.

Although a drop in interest rates can significantly increase your purchasing power, there are other ways you can improve your chances of getting a lower interest rate. According to Cohn, the key is to start early by improving your credit score.

“A lot of the better-rate banks will want to see someone have three to four different active trade lines on their credit history,” she said, noting that buyers should have enough money for the down payment plus extra. “We find that many first-time home buyers are stuck because they may have enough money for the down payment, but haven’t taken into account all the closing costs and what you need to have for reserves.”

Another way to curb interest rates is by considering an adjustable-rate mortgage or a government-backed mortgage, which often have a lower interest rate and may be more accessible.

Finally, keep an eye on the demand in your area. Sellers have been more open to offering incentives, such as mortgage interest rebates, cash for closing costs and even price reductions, so buyers still in the market should jump on these opportunities while they still can.

“When mortgage rates are higher, real estate prices tend to be a little softer,” Cohn said. “When interest rates fall … property prices will start to rise again and there will be more competition for the homes on the market.”

Gabriella is a personal finance journalist for Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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