Mortgage Rates Have Finally Begun to Drop. So Should You Buy?

Have you been wishing and hoping to become a homeowner sooner rather than later? I feel your pain -- I have also been watching mortgage rates climb since early 2022 and wondering if I've missed the boat on getting an affordable mortgage loan. There's been a bit of a bright spot recently, however. The average rate for a 30-year fixed mortgage loan is currently sitting at 7.44%, according to Freddie Mac -- this is down from 7.79% just a few short weeks ago.

Cue the disco ball and the smoke machine! It's time to shop for mortgage lenders and find a real estate agent, right? Well, it could be. Here's how to determine whether the time is right for you to buy with a slightly lower rate than we've seen in a while.

Your finances are in order: Consider buying

I started 2022 thinking I'd perhaps buy a home in 2023, but ultimately I changed my mind about that. But what I gave up in the form of a lower mortgage rate, I gained in peace of mind and a better financial foundation to become a homeowner. Jumping into homeownership any sooner than I intend to could have ended disastrously for me (and I've had enough bad experiences with owning a home to last a lifetime). By waiting, I'm giving myself the chance to keep saving money, keep watching the market, and take my time choosing a lender and a real estate agent.

What about you? The factors to focus on most closely are:

• Your credit score
• Your debt-to-income ratio
• Money you have saved for a down payment

Your credit score will determine whether you'll be approved for a mortgage loan, as well as the rate you'll get. A 620 FICO® Score is considered to be the minimum for a conventional mortgage loan, but you'll unlock a lot more savings if your score is 700 or higher.

Your debt-to-income ratio plays a role here, too, and ideally, you'll be able to fit a mortgage payment into your monthly budget without becoming house poor (meaning all your money is going toward housing costs, to the detriment of your life and other financial goals). If you have a decent credit score and low debt, it might be a good time to buy.

The last bit of the puzzle is the state of your savings account balance. You don't have to put down 20% on a home purchase, but your loan and monthly payments will be cheaper if you do (you'll get to skip paying for private mortgage insurance). Aim to put down as much as you're comfortable with -- but don't leave yourself broke! The expenses of homeownership can't be underestimated in deciding if you can afford to buy.

Your finances are shaky: Consider waiting

But what if your finances aren't quite so strong? Is it worth trying to buy a home now anyway, since you might be able to get a lower rate? Honestly, I say no. If your credit score could use some work or you have a lot of high-interest debt, you might not qualify for a rate as low as the average anyway. See what you can do to pay down debt and improve your credit score (and since one informs the other, you'll see a higher score if you whittle away your debt). Then reevaluate your finances to see if it's a good time to buy a home.

If you're lacking savings, you might still be able to buy with a low- or no-down-payment mortgage (such as a government-backed FHA or VA loan). These programs help a lot of people who might not otherwise be able to afford a home, and if you qualify for one, they're worth considering. However, going into a home purchase with little or no money down could see you end up underwater on your mortgage. This is when the home is worth less than you owe, and it's not out of the question -- home values fluctuate, after all. But you could be in real trouble if you need to sell in a hurry and can't make enough on the sale to pay off your existing mortgage.

For this reason, it's a good idea to make some kind of down payment on a home purchase. And don't forget your emergency fund -- if you have no savings when you get into a home, you'll need to go into debt to cover an unplanned home repair.

Lower mortgage rates have a lot of people celebrating -- personally, I'm hoping this is the start of a longer downward trend that has me saving a little money when I start the buying process in a few short months. But the decision of whether or not to buy remains a very personal one.