Mortgage rates have been on a roller coaster ride this year, rising and falling amid inflationary pressures and economic uncertainty. And even the experts are divided when it comes to predicting where rates are headed next.¹

 

This climate has been unsettling for some homebuyers and sellers. However, with proper planning, you can work toward qualifying for the best mortgage rates available today – and open up the possibility of refinancing at a lower rate in the future.

 

How does a lower mortgage rate save you money? According to Trading Economics, the average new mortgage size in the United States is currently around $410,000.² Let’s compare a 5.0% versus a 6.0% fixed-interest rate on that amount over a 30-year term.

 

Mortgage Rate (30-year fixed)	Monthly Payment on $410,000 Loan (excludes taxes, insurance, etc.)	Difference in Monthly Payment	Total Interest Over 30 Years	Difference in Interest
5.0%	$2,200.97		$382,348.72
6.0%	$2,458.16	+ $257.19	$474,936.58	+$92,587.86

 

With a 5% rate, your monthly payments would be about $2,201. At 6%, those payments would jump to $2,458, or around $257 more. That adds up to a difference of almost $92,600 over the lifetime of the loan. In other words, shaving off just one percentage point on your mortgage could put nearly $100K in your pocket over time.

 

So, how can you improve your chances of securing a low mortgage rate? Try these eight strategies:

 

 

1. Raise your credit score.

 

Borrowers with higher credit scores are viewed as “less risky” to lenders, so they are offered lower interest rates. A good credit score typically starts at 690 and can move up into the 800s.³ If you don’t know your score, check with your bank or credit card company to see if they offer free access. If not, there are a plethora of both free and paid credit monitoring services you can utilize.

 

If your credit score is low, you can take steps to improve it, including:⁴

 

●     Correct any errors on your credit reports, which can bring down your score. You can access reports for free by visiting AnnualCreditReport.com.

●     Pay down revolving debt. This includes credit card balances and home equity lines of credit.

●     Avoid closing old credit card accounts in good standing. It could lower your score by shortening your credit history and shrinking your total available credit.

●     Make all future payments on time. Payment history is a primary factor in determining your credit score, so make it a priority.

●     Limit your credit applications to avoid having your score dinged by too many inquiries. If you’re shopping around for a car loan or mortgage, minimize the impact by limiting your applications to a short period, usually 14 to 45 days.⁵

 

Over time, you should start to see your credit score climb — which will help you qualify for a lower mortgage rate.

 

 

2. Keep steady employment.

 

If you are preparing to purchase a home, it might not be the best time to make a major career change. Unfortunately, frequent job moves or gaps in your résumé could hurt your borrower eligibility.

 

When you apply for a mortgage, lenders will typically review your employment and income over the past 24 months.⁵ If you’ve earned a steady paycheck, you could qualify for a better interest rate. A stable employment history gives lenders more confidence in your ability to repay the loan.

 

That doesn’t mean a job change will automatically disqualify you from purchasing a home. But certain moves, like switching from W-2 to 1099 (independent contractor) income, could throw a wrench in your home buying plans.⁶

 

 

3. Lower your debt-to-income ratios.

 

Even with a high credit score and a great job, lenders will be concerned if your debt payments are consuming too much of your income. That’s where your debt-to-income (DTI) ratios will come into play.

 

There are two types of DTI ratios:⁷

1. Front-end ratio — What percentage of your gross monthly income will go towards covering housing expenses (mortgage, taxes, insurance, and dues or association fees)?
2. Back-end ratio — What percentage of your gross monthly income will go towards covering ALL debt obligations (housing expenses, credit cards, student loans, and other debt)?

 

What’s considered a good DTI ratio? For better rates, lenders typically want to see a front-end DTI ratio that’s no higher than 28% and a back-end ratio that’s 36% or less.⁷

 

If your DTI ratios are higher, you can take steps to lower them, like purchasing a less expensive home or increasing your down payment. Your back-end ratio can also be decreased by paying down your existing debt. A bump in your monthly income will also bring down your DTI ratios.

 

 

4. Increase your down payment.

 

Minimum down payment requirements vary by loan type. But, in some cases, you can qualify for a lower mortgage rate if you make a larger down payment.⁸

 

Why do lenders care about your down payment size? Because borrowers with significant equity in their homes are less likely to default on their mortgages. That’s why conventional lenders often require borrowers to purchase private mortgage insurance (PMI) if they put down less than 20%.

 

A larger down payment will also lower your overall borrowing costs and decrease your monthly mortgage payment since you’ll be taking out a smaller loan. Just be sure to keep enough cash on hand to cover closing costs, moving expenses, and any furniture or other items you’ll need to get settled into your new space.

 

 

5. Compare loan types.

 

All mortgages are not created equal. The loan type you choose could save (or cost) you money depending on your qualifications and circumstances.

 

For example, here are several common loan types available in the U.S. today:⁹

 

●     Conventional — These offer lower mortgage rates but have more stringent credit and down payment requirements than some other types.

●     FHA — Backed by the government, these loans are easier to qualify for but often charge a higher interest rate.

●     Specialty — Certain specialty loans, like VA or USDA loans, might be available if you meet specific criteria.

●     Jumbo — Mortgages that exceed the local conforming loan limit are subject to stricter requirements and may have higher interest rates and fees.¹⁰

 

When considering loan type, you’ll also want to weigh the pros and cons of a fixed-rate versus variable-rate mortgage:¹¹

 

●     Fixed rate — With a fixed-rate mortgage, you’re guaranteed to keep the same interest rate for the entire life of the loan. Traditionally, these have been the most popular type of mortgage in the U.S. because they offer stability and predictability.

●     Adjustable rate — Adjustable-rate mortgages, or ARMs, have a lower introductory interest rate than fixed-rate mortgages, but the rate can rise after a set period of time — typically 3 to 10 years.

 

According to the Mortgage Bankers Association, 10% of American homebuyers are now selecting ARMs, up from just 4% at the start of this year.¹² An ARM might be a good option if you plan to sell your home before the rate resets. However, life is unpredictable, so it’s important to weigh the benefits and risks involved.

 

 

6. Shorten your mortgage term.

 

A mortgage term is the length of time your mortgage agreement is in effect. The terms are typically 15, 20, or 30 years.¹³ Although the majority of homebuyers choose 30-year terms, if your goal is to minimize the amount you pay in interest, you should crunch the numbers on a 15-year or 20-year mortgage.

 

With shorter loan terms, the risk of default is less, so lenders typically offer lower interest rates.¹³ However, it’s important to note that even though you’ll pay less interest, your mortgage payment will be higher each month, since you’ll be making fewer total payments. So before you agree to a shorter term, make sure you have enough room in your budget to comfortably afford the larger payment.

 

 

7. Get quotes from multiple lenders.

 

When shopping for a mortgage, be sure to solicit quotes from several different lenders and lender types to compare the interest rates and fees. Depending upon your situation, you could find that one institution offers a better deal for the type of loan and term length you want.

Some borrowers choose to work with a mortgage broker. Like an insurance broker, they can help you gather quotes and find the best rate. However, if you use a broker, make sure you understand how they are compensated and contact more than one so you can compare their recommendations and fees.¹⁴

 

Don’t forget that we can be a valuable resource in finding a lender, especially if you are new to the home buying process. After a consultation, we can discuss your financing needs and connect you with loan officers or brokers best suited for your situation.

 

 

8. Consider mortgage points.

 

Even if you score a great interest rate on your mortgage, you can lower it even further by paying for points. When you buy mortgage points — also known as discount points — you essentially pay your lender an upfront fee in exchange for a lower interest rate. The cost to purchase a point is 1% of your mortgage amount. For each point you buy, your mortgage rate will decrease by a set amount, typically 0.25%.¹⁵ You’ll need upfront cash to pay for the points, but you can more than make up for the cost in interest savings over time.

 

However, it only makes sense to buy mortgage points if you plan to stay in the home long enough to recoup the cost. You can determine the breakeven point, or the period of time you’d need to keep the mortgage to make up for the fee, by dividing the cost by the amount saved each month.¹⁵ This can help you determine whether or not mortgage points would be a good investment for you.

 

 

Getting Started

 

Unfortunately, the rock-bottom mortgage rates we saw during the height of the pandemic are behind us. However, today’s 30-year fixed rates still fall beneath the historical average of around 8% — and are well below the all-time peak of 18.45% in 1981.^{16, 17}

 

And although higher mortgage rates have made it more expensive to finance a home purchase, they have also eliminated some of the competition from the market. Consequently, today’s buyers are finding more homes to choose from, fewer bidding wars, and more sellers willing to negotiate or offer incentives such as cash toward closing costs or mortgage points.

 

If you’re ready and able to buy a home, there’s no reason that concerns about mortgage rates should sideline your plans. The reality is that many economists predict home prices to continue climbing.¹⁸ So you may be better off buying today at a slightly higher rate than waiting and paying more for a home a few years from now. You can always refinance if mortgage rates go down, but you can’t make up for the lost years of equity growth and appreciation.

 

If you have questions or would like more information about buying or selling a home, reach out to schedule a free consultation. We’d love to help you weigh your options, navigate this shifting market, and reach your real estate goals!

 

 

Sources:

1.     Washington Post -
https://www.washingtonpost.com/business/2022/08/04/mortgage-rates-sink-below-5-percent-first-time-four-months/

2.     Trading Economics -
https://tradingeconomics.com/united-states/average-mortgage-size

3.     NerdWallet -
https://www.nerdwallet.com/article/finance/what-is-a-good-credit-score

4.     Debt.org -
https://www.debt.org/credit/improving-your-score/

5.     The Balance -
https://www.thebalance.com/will-multiple-loan-applications-hurt-my-credit-score-960544

6.     Time -
https://time.com/nextadvisor/mortgages/how-lenders-evaluate-your-employment/

7.     Bankrate -
https://www.bankrate.com/mortgages/why-debt-to-income-matters-in-mortgages/

8.     NerdWallet -
https://www.nerdwallet.com/article/mortgages/payment-buy-home

9.     Consumer Financial Protection Bureau -
https://www.consumerfinance.gov/owning-a-home/loan-options/

10.   NerdWallet -
https://www.nerdwallet.com/article/mortgages/jumbo-loans-what-you-need-to-know

11.   Bankrate -
https://www.bankrate.com/mortgages/arm-vs-fixed-rate/

12.   MarketWatch -
https://www.marketwatch.com/picks/as-mortgage-rates-rise-heres-exactly-how-more-homebuyers-are-snagging-mortgage-rates-around-4-01656513665

13.   Consumer Financial Protection Bureau -
https://www.consumerfinance.gov/owning-a-home/loan-options/#anchor_loan-term_361c08846349fe

14.   Federal Trade Commission -
https://consumer.ftc.gov/articles/shopping-mortgage-faqs

15.   Bankrate -
https://www.bankrate.com/mortgages/mortgage-points/

16.   CNBC -
https://www.cnbc.com/select/mortgage-rates-today-still-relatively-low/

17.   Rocket Mortgage -
https://www.rocketmortgage.com/learn/historical-mortgage-rates-30-year-fixed

18.   MarketWatch -
https://www.marketwatch.com/picks/continuing-home-price-deceleration-heres-what-5-economists-and-real-estate-pros-predict-will-happen-to-the-housing-market-this-year-01659347993

 

Higher Rates and Short Supply: The State of Real Estate in 2022

 

 

The last two years caught many of us off guard—and not just because of the pandemic. They also ushered in the hottest housing market on record, with home prices rising nationally by nearly 19% in 2021, driven primarily by low mortgage rates and a major supply shortage.¹

 

But while some had hoped 2022 would bring a return to normalcy, the U.S. real estate market continues to boom, despite rising interest rates and decreasing affordability.

 

So what’s driving this persistent demand? And is there an end in sight?

Here are three factors impacting the real estate market right now. Find out how they could affect you if you’re a current homeowner or plan to buy or sell a home this year.

 

 

MORTGAGE RATES ARE RISING FASTER THAN EXPECTED

 

Over the past couple of years, homebuyers have faced intense competition for new homes—in part due to historically low mortgage rates that were a result of the Federal Reserve’s efforts to keep the economy afloat during the COVID-19 pandemic.

 

However, in response to a concerning level of inflation, the Fed is now reversing those efforts by raising the federal funds rate. And as a result, mortgage rates are rising, as well. Few experts predicted, though, that mortgage rates would go up as quickly as they have.

 

In January 2022, the Mortgage Bankers Association projected that rates would reach 4% by the end of this year.² By mid-April, however, the average 30-year fixed mortgage rate had already hit 5%, up from around 3% just one year prior.³ On a $400,000 mortgage, that 2% difference could translate into an additional $461 per monthly payment.

 

Since then, mortgage rates have continued on an upward trend. So what impact are these rising rates having on demand? While many buyers had hoped for a cooling effect, experts warn that may not be the case.

 

Ali Wolf, chief economist at housing market research firm Zanda, told Fortune magazine, "Rising mortgage rates are having a counterintuitive effect on the housing market. Home shoppers are actually sprung into action in an attempt to buy a home before mortgage rates rise any higher."⁴

 

Since inventory remains low, the resulting “race” has kept the homebuying market highly competitive–at least for now.

 

What does it mean for you?

 

While current 30-year fixed mortgage rates represent an increase over previous months, they remain well below the historical average of 8%.⁵ As inflation across the economy continues, the Fed is likely to raise rates further this year. Buyers should act fast to secure a good mortgage rate. We’d be happy to refer you to a lender who can help.

 

For sellers, speed is also of the essence. The pool of potential buyers may shrink as mortgages become more expensive. And if you plan to finance your next home, you’ll want to act quickly to secure a favorable rate for yourself. Contact us today to discuss your options.

 

 

HOME PRICES KEEP CLIMBING

 

History shows that higher interest rates don’t necessarily translate to lower home prices. In fact, home prices rose 5% between 1980 and 1982, a period of significantly higher mortgage rates and inflation.⁵

 

Forecasters expect that home prices will continue to go up throughout 2022, though likely at a slower pace than the 18.8% increase of the last 12 months.⁴ Bank of America predicts that prices will be up approximately 10% by the end of this year, while Fannie Mae estimates 11.2%.^6,7

 

In addition to limited supply and a race to beat rising mortgage rates, home values are also climbing because of positive economic indicators, like low unemployment.⁸ Plus, rents are soaring–up 17% from a year ago–which is prompting more first-time homebuyers to enter the market.⁹ Add to that the continued popularity of remote work, and it’s easy to see why property prices continue to surge.

 

However, it’s not all bad news for prospective homebuyers. Economists expect that as mortgage rates rise, the rate of appreciation will continue to taper, though the effect may be gradual.

 

“Eventually mortgage rates will slow down home prices,” according to Ken Johnson, an economist at Florida Atlantic University interviewed by Marketwatch.¹⁰ “We should not see rapid upticks in prices as mortgage rates rise.” Forecasters agree—Fannie Mae expects price increases to slow to 4.2% in 2023.⁷

 

What does it mean for you?

 

While the pace of appreciation is likely to decrease next year, home prices show no signs of going down. However, current labor shortages are leading to higher salaries and better job opportunities for many workers. You may find that your income growth outpaces home prices, making homeownership more affordable for you in the future.

 

For homeowners, the outlook’s even brighter. You could find yourself sitting on a nice pile of equity. Contact us for a free home value assessment to find out.

 

 

INVENTORY REMAINS EXTREMELY LOW

 

As noted, one of the largest hurdles to homeownership is a lack of inventory. According to a February 2022 report by Realtor.com, there’s an expanding gap between household formation and home construction, which has resulted in a nationwide shortage of 5.8 million housing units.¹¹

 

The origins of this shortage date back to the 2008 housing crisis, during which crashing home values led contractors to stop building new properties—a trend that has not been fully reversed.¹²

 

That decline in home construction also resulted in a decrease in the number of home building professionals, a trend that was exacerbated by job losses during the COVID-19 pandemic. Now, many builders are limited by their ability to find qualified labor.

 

Another major challenge is a staggering increase in the cost of materials. Pandemic-related supply chain shortages have been a significant driver, with home building material costs rising on average 20% on a year-over-year basis. The price of framing lumber alone has tripled since August 2021.¹³

 

These trends add tens of thousands of dollars to the cost of a typical home. Factors like a lack of buildable land in many areas, restrictive zoning, and a shortage of developers are also contributing to the issue.¹⁴

 

Most homebuying experts agree that the lack of inventory is the primary factor driving rising housing prices and unprecedented competition for homes. With available housing units near four-decade lows, the end of the current housing boom is not yet in sight.¹⁵

 

What does it mean for you?

 

Prospective buyers should be prepared to compete for a home, since low inventory can lead to multiple offers. You may also need to expand your search parameters. If you’re ready to look, we’re ready to help.

 

For sellers, the picture is rosier. In this strong market, your home may be worth more than you realize. Contact us to find out how much your home could sell for in today’s market.

 

 

WE’RE HERE TO GUIDE YOU

 

While national real estate trends can provide a “big picture” outlook, real estate is local. And as local market experts, we can guide you through the ins and outs of our market and the local issues that are likely to drive home values in your particular neighborhood.

 

If you’re considering buying or selling a home, contact us now to schedule a free consultation. We can help you assess your options and make the most of this unique real estate landscape.

 

 

Sources:

1.     Marketwatch - https://www.marketwatch.com/picks/home-price-appreciation-will-normalize-what-5-economists-and-real-estate-pros-predict-will-happen-to-home-prices-in-2022-01646940841

2.     Bankrate -
https://www.bankrate.com/mortgages/mortgage-rate-forecast

3.     CNBC -
https://www.cnbc.com/2022/04/16/heres-how-much-the-same-mortgage-costs-now-compared-to-last-year.html

4.     Fortune -
https://fortune.com/2022/03/23/housing-market-interest-rate-economic-shock/

5.     National Association of Realtors -
https://www.nar.realtor/blogs/economists-outlook/instant-reaction-mortgage-rates-april-07-2022

6.     Fortune -
https://fortune.com/2022/03/16/home-prices-2022-2023-bank-of-america-forecast-mortgage-rates/

7.     Fortune -
https://fortune.com/2022/03/07/what-home-prices-will-look-like-2023-fannie-mae/

8.     Fortune -
https://fortune.com/2022/03/17/home-prices-drop-housing-markets-california-michigan-massachusetts-corelogic/

9.     CNN -
https://www.cnn.com/2022/03/23/success/us-national-rent-february/index.html

10.   MarketWatch -
https://www.marketwatch.com/story/home-prices-increase-at-one-of-the-fastest-rates-on-record-but-higher-mortgage-rates-should-slow-future-growth-11648559497

11.   Realtor.com -
https://www.realtor.com/research/us-housing-supply-gap-expands/

12.   NPR -
https://www.npr.org/2022/03/29/1089174630/housing-shortage-new-home-construction-supply-chain

13.   Investopedia -
https://www.investopedia.com/housing-market-dips-in-early-march-2022-5222449

14.   NPR -
https://www.npr.org/2022/03/29/1089174630/housing-shortage-new-home-construction-supply-chain

15.   Fortune -
https://fortune.com/2022/03/14/housing-market-key-metric-inventory-zillow-bad-for-buyers/

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