Mortgage Rates

WHAT YOU SHOULD KNOW ABOUT RISING MORTGAGE RATES

Posted: March 2, 2023

After steadily falling over the winter, mortgage rates have started to rise in recent weeks. This is concerning to some potential homebuyers as the combination of higher mortgage rates and higher prices has made homes less affordable. So, if you’re planning to purchase a home this year, you too may be wondering if now’s the right time to buy or if you should hold off on your search until rates come back down.

The recent uptick in rates has been driven by what’s happening with inflation. Joel Kan, Vice President and Deputy Chief Economist at the Mortgage Bankers Association (MBA), explains:

“Mortgage rates increased across the board last week, pushed higher by market expectations that inflation will persist, thus requiring the Federal Reserve to keep monetary policy restrictive for a longer time.”

The most recent weekly average 30-year fixed mortgage rate reported by Freddie Mac is 6.5%. It’s the third week in a row that rates have increased puts them at the highest point they’ve been this year (see graph below):

Advice for Home Shoppers

If you’re thinking about pausing your home search because rates have started to go up again, you may want to reconsider. This could actually be an opportunity to buy the home you’ve been searching for. According to the MBA, mortgage applications declined by 13.3% in just one week, so it appears the rise in mortgage rates is leading some potential homebuyers to pull back on their search for a new home.

So, what does that mean for you? If you stay the course, you’ll likely face less competition among other buyers when you’re looking for a home. This is a welcome relief in a market that has so few homes for sale.

BOTTOM LINE

Over the last few weeks, mortgage rates have risen. But that doesn’t mean you should delay your plans to buy a home. In fact, it could mean the opposite if you want to take advantage of less buyer competition. Let’s connect today to explore the options in our local market.

Mortgage Rates are always changing. If you would like to know the current mortgage rates or would like any strategy to find affordability in the current mortgage rate market, please give me a call today!

Strategy

The most common strategy around Mortgage Rates in the current market is to negotiate a 2-1 Buydown.

To show the advantages of a 2-1 Buydown, I have built this illustration. The essence is that the seller gives a concession to pay for a 2-1 buydown for the buyer. The buyer has a pegged payment based on current interest rates. But with the concession, the seller places money in escrow (a holding account) to subsidize the buyers’ payments by 2% less than the pegged rate in the first year and 1% less than the pegged rate in the second year. Here is the effect for the buyer:

As you can see, the 2-1 buy down would allow a buyer to save $1200 a month in the first year, or offer $100,000 more on a house in this example, while still saving ~$800 a month in the first year and ~$160 a month in the second year. The pegged rate is 6.5%, but the buyer is making a payment in the first year that is effectively 4.5%, and in the second year effectively 5.5%. The hope and strategy here is that the buyer has an opportunity to refinance into a lower rate and has a 2-year runway to do so to maintain that monthly affordability.

The seller concession in this illustration is ~$22k-$23k depending on the purchase price. Thus, the buyer can offer that much more on their purchase price to make the seller whole and have a large monthly savings.

OTHER THINGS TO KNOW:

• As the purchase price increases, so does the down payment. IE - it might allow you to get into a house with monthly affordability, but you will have to put more down if you want to keep the same down payment %. There are plenty of options to put less than 20% down on a home.
• The home still needs to be appraised. We aren’t having any issues with appraisals these days, but it could be a snag, and it is important to understand the possibility that if you offer slightly higher, it needs to appraise slightly higher.
• If the buyer refinances before the buydown funds are fully utilized, those funds go to the buyer.
• In my opinion, this is a win/win. It allows the seller to sell the home quicker and for their required price, and it gives the buyer affordability and a runway to operate with.
• This can allow a buyer to operate in a high-interest rate environment, gain affordability, and purchase while much of the buyer competition is on the sidelines. It does require the buyer to take on the risk that interest rates don’t come down and a refinance opportunity doesn’t present itself. That said, this is the ultimate “Date the Rate, and Marry the House Opportunity”.

THIS IS A BASIC ILLUSTRATION OF THIS STRATEGY. THERE ARE OTHER OPTIONS TO GET MORE AGGRESSIVE. PLEASE CALL ME TODAY AT (720) 955-8337 TO DISCUSS VARIOUS OPTIONS.