If you’re feeling unsure about how mortgage rates might impact your home-buying plans, you’re not alone. With rates fluctuating and market conditions shifting, the path to securing a home loan can feel more complicated than ever. 

There are a lot of questions to consider, such as:

• What is the current state of the mortgage market and how is it trending? 
• Should you focus on locking in your rate now or wait for potential drops later in the year?
• How will that decision impact your long-term finances and return on your investment?
• Is a bigger down payment really the right move, or should you keep more cash on hand?
• How can you best use your money and maximize your return on investment? 

To help make sense of it all, we turned to Ted Aanestad, a seasoned mortgage advisor in Sonoma County. 

SOMO Village: What are the current mortgage rate trends in Sonoma County, and how do they impact potential homebuyers? 

Ted Aanestad: Mortgage interest rates aren’t terrible right now—somewhere between the mid-sixes and mid-sevens on some mortgage products. They’re much better than they have been in the last few years. 

That said, based on the average loan amount we’re seeing these days, lenders are really focused more on monthly payments than interest rates—how much buyers can afford to spend each month.

While rates have improved, mortgage payments can still become less affordable on higher-priced homes—and homes in Northern California are notoriously expensive.

This can be especially challenging for first-time homebuyers who haven’t had the chance to build equity in their current home that can be carried forward to their next purchase.

In some regions of the country, you might only need a $150,000 mortgage to buy a house, whereas in Northern California, it’s not uncommon to see high-six-figure and seven-figure home prices. And, at that price point, the interest rate has a huge impact on your monthly payments.

So, rather than just looking at mortgage rates, we look at what that mortgage will cost you on a monthly basis and what that cost would be proportionate to your income and other living expenses.

Do you anticipate that mortgage rates will drop?

Right now, we’re entering an election year, and while politics don’t have a direct effect on mortgage rates, there is an indirect correlation.

Historically, over the past 15 elections, we’ve always seen rates dip a little bit. 

So, when you’re trying to guess what will happen with rates, you need to combine that fact with the trends we’re seeing with inflation right now. 

The target inflation rate is 2% in the United States. 

We’ve seen it go into the double digits in the past few years, and we’re finally starting to see it come down to a more manageable level. 

As we approach that target inflation rate, you’re going to see the Fed start cutting rates.

At the moment, it’s being speculated that we’re going to see the first rate cut happen towards the end of this year. 

But here’s where it gets interesting:

For every one percent that interest rates drop, six percent more buyers enter the real estate market. 

To put that into context, we have around 500,000 people in Sonoma County right now. So, if interest rates drop by one percent, we can expect around 30,000 new buyers to enter the market. 

Are reduced mortgage rates good or bad for prospective homebuyers in Sonoma County?

This is simple supply and demand: we have a limited supply of homes in Sonoma County. 

So, if rates drop by 1% and 30,000 new people want to purchase homes here, competition goes up. As the competition goes up, so do the home prices. 

Why?

Because, psychologically, humans are hardwired to push things to their limits, and this applies to buying homes.

For most people, getting approved for a $1 million mortgage means they’re going to spend the whole million. 

So, as we see interest rates drop, buyers will have more purchasing power, and this can artificially inflate the price of homes. 

If a house is listed for $750,000 but there are five people bidding for it who are approved for an $825,000 mortgage, they’re going to want to offer more to ensure they get the home.

As mortgage rates drop, more buyers enter the market, and they can afford to spend more money, in turn creating competition and driving up home prices across the board. 

So, for prospective homebuyers, reduced interest rates are a double-edged sword. 

With current mortgage rates, is it a good time to buy a home? Why or why not? 

In my opinion, right now is the perfect time for people to buy a home.

I say that based on the impact of interest rate reductions.

Right now, we’re seeing light at the end of the tunnel. The Fed is seriously discussing lowering interest rates—but it hasn’t happened yet.

People are still weary, and the market hasn’t been flooded with buyers yet. 

If you can get into the real estate market or make a home purchase before new buyers enter the race, you’re going to do well in building appreciation in your home over the next few years.

Since competition levels are still relatively low, you can buy a home close to the asking price rather than getting into a bidding war with other buyers.

What’s the right balance between purchase prices, interest rates, and home value appreciation? 

It always makes sense to have a lower purchase price. In doing so, you’re lessening the total debt you’re going to have on your home. 

The lower your home purchase price, the lower your total interest will be. This, in turn, reduces your monthly payments. And, since you bought at a lower purchase price, there’s more upside potential on your home, meaning you’re likely to see your home’s value appreciate more over time. 

This lets you build equity more quickly and, again, keeps the door open to refinancing at a lower interest rate later on. 

Should homebuyers opt for bigger or smaller down payments?

Getting a down payment together is one of the biggest barriers to homebuying in Sonoma County—especially for first-time buyers.

So, I believe that cash is king.

The more money you can keep in your pocket, the more you can have in reserve for a rainy day fund or for building toward your next investment.

You have to crunch the numbers.

And, in reality, putting an extra $10,000 down is not going to make much of a difference in your monthly payments—probably around $50 per month.

In my opinion, you’re better off having that $10,000 in your pocket than saving $50 per month, as long as you’re not overleveraging yourself. 

When people are entering the market, particularly first-time homebuyers, I’d generally encourage them to put less money down. 

In this market, we can anticipate reduced interest rates on mortgages and an appreciation rate of around 6% over the next five years in Sonoma County. 

So, you might be able to put 3.5% down today, but five years from now, you might have 20% equity in your home, just based on appreciation. 

My advice is that you should keep as much cash in the bank as possible and keep your lifestyle as comfortable and affordable as you can. 

Then, when you decide to refinance your home—ideally at a lower interest rate—and it’s time to upgrade to your next house, you’ll have more options. You might be able to buy a new home and keep your current one and rent it out, or you can sell it and move into a bigger house that better accommodates your lifestyle at that time. 

Sonoma County is one of those unique areas where there’s not a lot of building going on, other than SOMO Village in Rohnert Park. 

It’s also one of those areas where people travel from around the world to visit. It’s a great place to live. There are amazing parks and schools. It’s very family-friendly. 

When you come back to the concept of simple supply and demand, the facts are clear: minimal building in Sonoma County paired with reduced rates that increase competition and buying power equals increased home values.

The sooner you can get into the market with a monthly payment you’re comfortable with, the better. You can beat out the buyers who will flood the market as rates drop and ultimately put yourself in a position to secure a great investment. If you’re considering buying a home and want to know more about your lending options and how much you need for a down payment for a house in California, reach out to Ted and his team at 101 Home Loans or reach out by email or phone: Ted@101homeloans.com or (707) 477-0945.

Learn More About SOMO Village

If you’re interested in living in a sustainable community that fuses the best of city living with the country lifestyle and all the amazing things that Sonoma County has to offer, we invite you to visit SOMO Village. To learn more, download our residential project brief or get in touch with us today.

About Ted Aanestad

Ted is a local Sonoma County mortgage advisor who’s worked in lending for over 10 years. In that time, he’s worked with countless clients to determine the right down payment for a house in California, get approved for a loan, and purchase their dream home. Ted is the branch manager at 101 Home Loans and is available to discuss any home-buying needs and loan requirements in Sonoma County. Connect on LinkedIn or contact him to book a call.