rate lock-in

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Lately, some mortgage lenders have pitched “buy now, refinance for free” offers to get more home buyers to take the plunge.

The thinking is mortgage rates will be lower in the near future. And when that time comes, you won’t have to pay any lender fees.

This can even sway the decision to buy a home, assuming you’re on the fence about renting vs. buying because it feels too expensive today.

These offers sound like a win-win for the home buyer, as they’ll get a lower interest rate and avoid potentially thousands in closing costs.

But there are quite a few issues with this line of thinking that are worth discussing.

Nobody Knows If Mortgage Rates Will Rise or Fall

Last I checked, mortgage rate predictions have been a tough game. Prior to early 2022, mortgage rates defied the forecasts.

While most expected them to rise, they hit fresh all-time lows and stayed at those levels for much longer than expected.

Then the Fed announced an end to it Quantitative Easing (QE) program and the start of Quantitative Tightening (QT), which sent shockwaves through the mortgage market.

Accompanied by 11 Fed rate hikes, the 30-year fixed surged from around 3% in January 2022 to as high as 8% in October 2023.

Once again, no one expected this, and most predictions called for improvements in 2023 after a rough 2022.

Instead, mortgage rates climbed even higher, leading to the lowest mortgage demand in decades.

People stopped buying homes and virtually nobody refinanced their mortgage. Even worse, existing owners won’t sell because they don’t want to lose their ultra-low interest rate.

This so-called mortgage rate lock-in effect has stifled inventory, which was already low to begin with.

It also partially explains why home prices remain so high, in spite of much more expensive mortgage rates. There’s no supply.

To entice buyers, some real estate agents and mortgage lenders have pitched the phrase, marry the house, date the rate.

The logic is you can still buy your forever home today, while mortgage rates are high. But refinance that pesky high mortgage rate once they fall again.

Problem is they haven’t fallen. And those predictions didn’t pan out. At least not yet.

Speaking of, take a look at the 2024 mortgage rate predictions if you think they’ll be of any use.

Mortgage Rates Are About 1% Below Their Recent Peak

Over the past month and change, the 30-year fixed has come down about one percentage point.

It surpassed 8% in mid-October before falling precipitously, thanks to favorable economic data.

Several reports hinted at possible weakness in the economy, pushing bond yields down from their recent highs while mortgage rates followed.

At the same time, the Fed is expected to cut rates several times in 2024 as the economy cools.

The thought is inflation has peaked, and restrictive monetary policy can ease somewhat.

This is all good news for mortgage rates, which tend to fall when inflation is low, or when the economy is showing signs of weakness.

But there’s still no guarantee mortgage rates will come down. Nor is there a guarantee they’ll fall by an amount necessary to make a refinance worthwhile.

I don’t subscribe to a refinance rule of thumb, but generally you’d want an interest rate at least 1% below your current rate for it to be worth it.

Once you factor in the closing costs, you’ll need to realize some decent monthly payment savings to make it worthwhile. And to break even on those upfront costs.

These Refinance for Free Later Deals Have Some Issues

  • Will mortgage rates fall enough in the future to make the refinance work?
  • Will this lender still be in business and agree to the terms of the deal?
  • Will anything change that limits your ability to refinance (credit score, property value, etc.)
  • What if a different lender has a lower rate in the future?
  • Could this type of offer pressure you into buying a home today if you’re unsure or not ready?

To make a refinance more compelling, or at least easier to pencil, some mortgage lenders are offering a free one in the future if you use them for a home purchase loan.

It seems like a no-brainer. Why not take them up on the deal, right? Well, there are myriad issues with these types of offers.

For one, you have to use the same lender twice. And you have to use the lender offering the free refinance deal to begin with.

So their “refinance for free” deal might stop you from shopping your rate with other banks, lenders, brokers, etc.

The next problem is this lender might not even be in business once it comes time to refinance. Trust me, many lenders have closed their doors as business has dried up.

And if you do use them again in the future, you’ll need to hope they have the lowest rate compared to other lenders. What are the chances of that?

Then there is the pesky issue of mortgage rates. Remember, nobody is very good at predicting them.

Sure, they could drop. But they might not. Or they may not fall enough to make the refinance worthwhile.

At the same time, you’ll need to qualify for the refinance. What if home prices fall between now and then, and you’ve got negative equity to deal with?

Or something else comes up that limits your ability to refinance? Perhaps a lower FICO score, a gap in employment, etc.

Ultimately, you’re probably better off going with the lowest combination of rate and fees you come across today.

And if and when the time comes to refinance in the future, do the same exact thing. Look for the best deal in front of you.

There are simply too many variables and unknowns to bank on a free refinance in the future.

Source: thetruthaboutmortgage.com

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Well, another year is nearly in the books, which means it’s time to look ahead at what 2024 might have in store.

As is customary, I take a look at mortgage rate predictions from a variety of economists and offer up my own take for the upcoming year.

I also look back at the predictions for the current year to see how everyone did (hint: not well!).

The big story in 2023 was out of control inflation. The story going forward might be cooling inflation.

Though there’s also the risk it resurges, at which point mortgage interest rates could rise again.

Mortgage Rates Are Expected to Go Down in 2024

First let’s talk about the general outlook. Most expect mortgage rates to go down in 2024, which was actually the call in 2023 as well.

But guess what? Everyone was wrong. Expectations that the 30-year fixed would fall back into the 5% range were way off.

Instead, interest rates on the popular loan program surpassed the 8% mark before finally letting up over the past month.

So while many economists are optimistic for the coming year, take note that they felt the same way a year ago. And got it wrong.

But things aren’t exactly the same. The Fed increased its fed funds rate 11 times, which many believe has worked to corral inflation.

And this could lead to weak economic output and rising unemployment, which could result in Fed rate cuts as early as March 2024.

This doesn’t necessarily mean mortgage rates would follow the Fed lower, but it could signal that the worst is behind us.

As such, mortgage rates may have peaked, and it’s possible they could continue to drift lower and find a comfortable medium between their old record lows and recent near-21st century highs.

MBA 2024 Mortgage Rate Predictions

First quarter 2024: 7.1%
Second quarter 2024: 6.6%
Third quarter 2024: 6.3%
Fourth quarter 2024: 6.1%

First up is the Mortgage Bankers Association (MBA), which is often fairly bullish about mortgage rates improving.

They are, after all, fans of mortgages being originated, and lower rates equate to higher funding volume.

Last year, they predicted that the 30-year fixed would ease throughout 2023 and average 5.2% in the fourth quarter.

That didn’t work out as planned, with the 30-year fixed closer to 7% today. And it was actually above 8% just a month ago.

Still, they are predicting lower mortgage rates in 2024, just as they did last year. The difference this time around might the inflation story.

It has cooled a lot since then, which could lead to Fed rate cuts and an easing in the 10-year treasury yield, which correlates well with mortgage rates.

Ultimately, they may have expected inflation to improve faster than it did, which is why they got rates wrong in 2023.

Now that inflation actually is significantly lower, their predictions could come to fruition. Also note that their latest prediction is a full percentage point higher than it was a year ago.

They only expect the 30-year fixed to fall to 6.1% by the end of 2024 versus 5.2% when they made the same forecast a year ago.

Fannie Mae 2024 Mortgage Rate Predictions

First quarter 2024: 7.6%
Second quarter 2024: 7.4%
Third quarter 2024: 7.2%
Fourth quarter 2024: 7.1%

Next up is Fannie Mae, which purchases and securitizes conforming mortgage loans.

They are a lot less bullish than the MBA, as they expect the 30-year fixed to remain in the 7% range for all of 2024.

It’s possible they’ll update their forecast in light of recent improvements in mortgage rates.

But as it stands, they don’t expect the 30-year fixed to drop below 7.10%, which is basically where it’s at now.

So we can take this to mean they expect mortgage rates to remain relatively flat at these new, higher levels for much of 2024.

I will update their numbers if they release a new forecast before the end of 2023.

Freddie Mac 2024 Mortgage Rate Predictions

First quarter 2024: n/a
Second quarter 2024: n/a
Third quarter 2024: n/a
Fourth quarter 2024: n/a

While Freddie Mac stopped releasing a monthly outlook for mortgage rates (for reasons unknown), they still do a monthly commentary.

And from that we can glean some ideas about where they think mortgage rates will go in 2024.

Their latest outlook notes that they expect “recent volatility in Treasury yields to abate which will allow modest reductions in mortgage rates.”

How modest? Well, they said mortgage rates will probably not fall below 6% “in the short run” thanks to the higher for longer narrative.

But given the recent improvement in rates (and the 10-year bond yield), it’s possible rates could get back in the low-6s in 2024.

And if the borrower pays discount points, a rate in the 5% range is also possible, assuming those mortgage rate spreads tighten due to decreased volatility.

A year ago, they expected the 30-year fixed to fall to 6.1% by the fourth quarter of 2023. So perhaps they’re being a bit more conservative.

However, they expect home prices to rise a further 2.6% in 2024 thanks to mortgage rate lock-in effect and favorable demographics, including an elevated share of first-time home buyers.

NAR 2024 Mortgage Rate Outlook

First quarter 2024: 7.5%
Second quarter 2024: 6.9%
Third quarter 2024: 6.5%
Fourth quarter 2024: 6.3%

The National Association of Realtors (NAR) releases a monthly U.S. Economic Outlook that contains their mortgage rate predictions for the year ahead.

I’m going off their October version until I can get a more updated one, so I expect their numbers to get even more optimistic given the recent improvement in mortgage rates.

There’s even a chance they’ll throw out a number in the high-5% range for the fourth quarter of 2024.

NAR chief economist Lawrence Yun also expects the 30-year fixed to average between 6-7% by the spring home buying season.

He added that “we’ve already reached the peak in terms of interest rates.” So his expectation is it’ll get better from here. The question is how much better.

Zillow’s 2024 Mortgage Rate Prediction

Next we have Zillow. Sometimes they make mortgage rate predictions, sometimes they don’t.

Given how wrong everyone has been lately, they said, “Predicting how mortgage rates will move is a nearly impossible task…”

However, they do expect home prices to “hold steady in 2024,” declining by a negligible 0.2%.

They also believe mortgage rates may “hold fairly steady” too in coming months if recent inflation readings are any indication.

Together, the cost of buying a home could level off next year, or even drop if mortgage rates do too. But they aren’t throwing out specific numbers.

Interestingly, Zillow expects more mortgage rate locked-in homeowners to “end their holdout for lower rates and go ahead with those moves.”

So even if rates don’t get much better, the holdouts might say enough is enough and list their properties.

If rates do keep dropping, this argument becomes even more compelling. So much-needed supply could be freed up in the process.

Redfin 2024 Mortgage Rate Predictions

Meanwhile, Redfin believes mortgage rates will steadily decline throughout 2024, but remain above 6%.

Specifically, they expect the average 30-year mortgage rate to linger around 7% in the first quarter, then inch down as the year goes on.

By the end of 2024, the real estate brokerage thinks mortgage rates will fall to about 6.6% thanks in part to 2-3 rate cuts from the Fed.

Offsetting these cuts is the expectation that we will avoid a recession in 2024. So a lack of serious economic pain means more modest declines in rates as opposed to sizable ones.

Still, they see home buyers finally catching a break because home prices are also predicted to be flat.

This means monthly payments will fall further from their recent all-time highs, which we can all agree is a good thing.

Realtor 2024 Mortgage Rate Forecast

Meanwhile, the economists at Realtor.com are predicting a minimal decline in mortgage rates, but still an improvement.

They expect the 30-year fixed to average 6.8% in 2024 after averaging 6.9% in 2023. So just a 10-basis point decrease.

However, they do expect rates to finish off 2024 at 6.5%, which is a little more optimistic.

It’s also markedly better than the 2023 year-end expectation of 7.4%. And would essentially take us back to the end of 2022, when the 30-year fixed averaged 6.42%.

In other words, we might be able to forget 2023 ever happened. But we still won’t be able to revisit early 2022 anytime soon.

At that time, the 30-year fixed was a mindboggling 3.22%.

The Truth’s 2024 Mortgage Rate Predictions

First quarter 2024: 6.875%
Second quarter 2024: 6.625%
Third quarter 2024: 6.25%
Fourth quarter 2024: 5.875%

Like everyone else, I was wrong about mortgage rates in 2023. I thought they’d slowly move lower throughout the year before ending the year around 5%.

Instead, we are closer to 7% today, which is a pretty big miss. That being said, what I assumed would play out last year (lower inflation), seems to be happening now.

There are also several rate cuts now expected in 2024, with the CME FedWatch Tool favoring a 4% – 4.25% range for the federal funds rate by December 2024.

The 10-year bond yield is also expected to moderate further, and could be back to the mid-3% range.

If we assume that mortgage rate spreads also tighten from their current levels near 300 bps to something more reasonable, such as 200 bps, we could see noticeably lower mortgage rates in 2024.

Taken together, a spread of 200 bps and a 3.5% 10-year yield could signal a return to mid-5% mortgage rates.

That might sound a little too good to be true, so I’ll err on the side of caution and go for an average rate as low as 5.875% to end the year.

Remember, there are still a lot of unknowns and potential curveballs ahead. We’ve got multiple geopolitical events that are still unfolding.

And potentially the most contentious U.S. presidential election in history. So as always, mortgage rates will ebb and flow, and opportunities will present themselves.

There will be good months and bad months, but I expect mortgage rates to continue trending lower as 2024 unfolds.

(photo: Marco Verch, CC)

Source: thetruthaboutmortgage.com

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Silverton Mortgage has rolled out a series of mortgages that feature 100% financing in light of ongoing affordability woes.

Some of the loan programs rely on down payment assistance via a second mortgage that can cover both closing costs and the down payment.

These options are available on conventional loans and FHA loans, complementing other zero down options already available via the VA and USDA.

As home prices continue to move higher, mortgage lenders are increasingly looking for options to keep homeownership in reach.

They join several other banks and lenders that have recently launched zero down options for home buyers.

Silverton’s Conventional Program with Down Payment Assistance

While home loans backed by Fannie Mae and Freddie Mac typically require at least a 3% down payment, Silverton Mortgage has a solution to offer 100% financing.

Their “Conventional Program with down payment assistance” features a conforming mortgage loan set at 97% combined with a second mortgage.

The second mortgage can be used for a down payment and/or toward closing costs.

Together, these two loans can provide 100% financing to help prospective home buyers get into a new property with little or nothing out of pocket.

It is available in 32 states throughout the nation (Silverton does business in 45 states).

In September, San Antonio-based Frost Bank re-entered the mortgage biz with its Progress Mortgage, a zero down conventional loan that doesn’t require mortgage insurance (PMI).

A month earlier, Zillow Home Loans began piloting a 1% down mortgage via the use of a 2% grant for a 97% LTV mortgage.

Many others have also rolled out 1% down loans, including Guaranteed Rate OneDown, Guild Mortgage’s 1% Down Payment Advantage, and Rocket Mortgage One+.

You can even get a 1% down conventional loan via mortgage brokers thanks to a recent offering from the nation’s top lender, United Wholesale Mortgage.

Silverton’s FHA Program with Down Payment Assistance

The company has concurrently launched an FHA loan option with down payment assistance that achieves the same result.

Instead of requiring a 3.5% down payment, which is the minimum for an FHA loan, they combine a first mortgage with a second, known as a combo loan.

Together, the two loans can allow up to 100% financing, and even cover any closing costs the borrower may have.

It comes in two different options, one forgivable (if certain conditions are met) and one repayable.

This means the borrower may not even have to pay back the second mortgage in some cases.

It’s available in all 45 states where Silverton Mortgage is currently licensed.

Last month, loanDepot launched accessZERO, which also features an FHA loan with no money down.

Silverton Mortgage’s Community Lending Options

Aside from these two programs, Silverton also offers down payment assistance programs in eight states via its community lending team.

These specialty programs are accessible via state, county, and city housing authorities.

Other than featuring a low or no down payment, they also include flexible underwriting guidelines that could make it easier to qualify for a home loan.

They are available in Alabama, Florida, Georgia, Indiana, North Carolina, Ohio, South Carolina, and Tennessee.

On top of these options, Silverton also offers both VA loans and USDA loans, which allow for 100% financing without the need for a second mortgage.

Silverton also notes that “many” who obtain a VA loan through the company won’t have to pay lender fees.

The big question is if borrowers will still be able to qualify DTI-wise, as monthly payments are still quite pricey, especially at 100% financing.

Sure, you don’t need to come to the closing table with a large down payment, but what do the payments look like on two mortgages instead of one?

The good news is mortgage rates have retreated about one percentage point since hitting 20-year highs back in October.

If they continue to trend lower, existing home sales should pick back up. Speaking of, pending sales hit a new record low in October, per NAR, which has tracked the metric since 2001.

This made sense because mortgage rates also peaked during the month and were nearly the highest they’ve been this century.

Ideally it marks a bottom for existing sales, which have suffered due to a lack of resale inventory and high mortgage rates, which has also caused mortgage rate lock-in.

Silverton Mortgage, founded in 1998, is based out of Atlanta, Georgia.

Source: thetruthaboutmortgage.com

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Mortgage rates finally caught a break last week after steadily rising throughout much of 2023.

The 30-year fixed fell about a half a percentage point in the matter of a week as softer economic data eased inflation concerns.

At the same time, the Fed left its key policy rate unchanged and signaled it could be done raising rates.

Now, investors are hoping the next policy move is a rate cut, as data is expected to continue to cool into 2024.

Taken together, that could mean a return to more palatable mortgage rates in 2024.

Lower Mortgage Rates Before the Presidential Election?

The president and CEO of the nation’s top mortgage lender, United Wholesale Mortgage (UWM), is bullish on mortgage rates next year.

During his monthly 3Points video, former college basketball player Mat Ishbia said he expects mortgage rates to drop before the election.

The election in question is the 2024 Presidential Election, which takes place on Tuesday November 5th, 2024.

“And I think it might even happen sooner like March, April, May,” he said in the video.

But how much lower will rates fall? Well, that’s another story, as a return to 3% mortgage rates likely isn’t in the cards.

Same goes for 4% rates, and maybe even 5% rates. However, that doesn’t mean smaller improvements can’t be impactful for the struggling mortgage industry.

“We’re talking about dropping to 5 and a half, 6, even 6 and a half,” he added. “And it’ll be a massive refi opportunity.”

It’s possible we’ll see a return of rate and term refinances if mortgage rates drop enough relative to the rates obtained by home buyers over the past year and change.

Assuming some of these borrowers took out high-7 or even 8% mortgage rates, there might be a case to be made if rates return to the low 6%s or high 5%s.

Generally, you want at least a 1% reduction in mortgage rate, though there isn’t a hard and fast refinance rule of thumb.

Lower Mortgage Rates Will Also Unlock Existing Housing Inventory

Ishbia also noted that beyond the refinance opportunity, there will be more inventory next year as interest rates fall.

“But beyond that, even more purchases, more inventory will open up.”

This speaks to the mortgage rate lock-in effect that has stifled the existing home market.

In short, homeowners with 3% mortgage rates have their hands tied, as moving to a new home at current prices with a 7 or 8% rate just doesn’t pencil.

But if rates come down to more reasonable levels, some of these homeowners will be financially able to sell and move, or will simply be OK with taking on a higher payment.

Rates aside, he believes home purchase lending volume will increase, referencing a recent Fannie Mae forecast.

Fannie expects 2024 home purchase loan origination volume to increase 10% to $1.44 trillion.

Meanwhile, they believe mortgage refinance volume will rebound to $456 million, nearly double the dismal $250 million anticipated for this year.

The refinance share is also expected to rise from around 16% this year to 24% next year.

There Is No Mortgage Rate Rescue Plan Coming…

Lastly, he dispelled the idea that some sort of mortgage rate rescue plan was going to materialize.

“That’s not going to happen.” We think the market is what the market is and that we’re going to see things happen as we’ve expected.”

About a month ago, industry groups including NAR and the Community Home Lenders of America lobbied Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell.

They pointed out that mortgage rate spreads relative to the 10-year treasury yield had doubled in recent months.

Typically about 170 basis points, they have exceeded 300 bps for a while now, putting even more pressure on mortgage rates.

In a letter, the groups proposed a plan to allow Fannie Mae and Freddie Mac, on a temporary basis, to purchase their own mortgage-backed securities (MBS).

And/or purchase Ginnie Mae MBS (those backing FHA and VA loans) for a defined period of time.

Additionally, they called on the Federal Reserve to maintain its stable of MBS and suspend runoff until spreads normalized.

It seemed to fall flat as it would completely contradict recent action by the Fed to tackle inflation, which arguably was caused by an overly accommodative rate environment.

In a nutshell, the ultra-low mortgage rates were how we got into this mess to begin with, so lowering them again may actually do more harm than good.

Sure, there’s a happy medium in between 8% mortgage rates an 3% mortgage rates, and the hope is we’ll get back there in the next year or two.

But if rates come down too quickly, or fall too low, you’ve got the bidding wars again, unhealthy demand, and so on. That’s not good for anybody long-term.

Source: thetruthaboutmortgage.com

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While there has been some debate about the so-called mortgage rate lock-in effect, it appears to be a pretty legit force in the housing market today.

As the logic goes, existing homeowners aren’t moving because their mortgage rates are so low.

But it’s not only that they’re so low, it’s also the cost of replacement, with prevailing market rates now edging closer to 8%.

So it just doesn’t make a lot of financial sense for homeowners to move unless they absolutely have to.

And for many, it’s probably not even doable, thanks to a massive increase in costs if exchanging a 3% rate for a near-8% rate.

Is Mortgage Rate Lock-In a Real Thing?

A new survey from Fannie Mae explored mortgage rate lock-in and found that while it is certainly a reason for staying put, it’s not the only reason.

The company asked homeowners via their National Housing Survey if they planned to stay in their current homes longer than originally intended. And if so, why.

They found that an equal 29% share of owners with a mortgage (mortgage borrowers) and outright owners (homeowners without a mortgage) planned to stay put longer.

Of the mortgage borrower population, 21% indicated the decision was primarily due to having a low mortgage rate.

But Fannie points out that this subset of homeowners only represents 6% of all mortgage borrowers.

“These survey results lead us to conclude that there are multiple factors contributing to the historically low supply of existing homes for sale.”

“While the lock-in effect is real for many consumers, the full range of reasons provided by mortgage borrowers and outright owners for planning to stay in their homes longer paints a significantly more nuanced picture.”

There Are Many Reasons Why Housing Tenure Has Increased, But a Low Mortgage Rate Still Tops the List

The Fannie Mae researchers argued that even if mortgage rates were to decline by a meaningful amount in the intermediate term, they would not expect to see a big surge in for-sale listings.

They believe there are a “confluence of factors and trends contributing to the lack of housing inventory in the United States,” with the mortgage rate lock-in effect one of several.

Still, it did top the list for those with a mortgage. As you can see in the chart above, 21% of homeowners with a mortgage cited their lower mortgage rate as the primary reason for staying in their current home longer than intended.

That was the number one response, though it was trailed fairly closely by a homeowner simply liking their home/location.

Of course, one could argue that it’s easier to like your home if you’ve got an ultra-low mortgage rate attached to it.

And let’s not forget that these folks also likely got in when home prices were significantly cheaper.

When the 30-year fixed mortgage hit a record low back in 2021, home prices were also a lot lower. In some areas, home values may be up nearly 50% over that time.

So these homeowners have very cheap housing payments relative to what’s on offer today, between their smaller loan amount and significantly lower mortgage rate.

If you don’t believe mortgage rate plays a role, simply look at homeowners without a mortgage.

These free and clear borrowers are focused on other things, like the location, proximity to job and family.

Mortgage Rate Disparity Affects Everyone, Even Cash Buyers

But that doesn’t mean they don’t care about mortgage rates because it’s also makes a move for them more difficult.

Assuming they can’t pay for a home with cash, they too would have to face the higher mortgage rates currently on offer.

So for them, it may also be “too expensive to move,” factoring in a higher asking price and steep mortgage rate.

One could also blame the lack of for-sale inventory on the disparity between mortgage rates then versus now.

Fewer for-sale listings mean it’s harder to find a replacement property. This too could contribute to homeowners determining that they like their existing properties more.

They could be resigned to the fact that moving is out of question, and/or put more work into making their existing digs better.

At the end of the day, you could argue that this speaks more to the general lack of affordability in today’s housing market than anything else.

And until we see more supply hit the market, it’s not going to change, even if mortgage rates do come back down to more reasonable levels.

Source: thetruthaboutmortgage.com

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You’ve probably heard of the mortgage rate lock-in effect, where homeowners are unwilling (or unable) to give up their ultra-low mortgage rates.

Also known as golden handcuffs, these low rates have arguably prevented many existing homeowners from moving, and certainly from refinancing.

But now one bank may hold the key to unlocking some of these borrowers with their so-called “split-the-difference” mortgage rate program.

As the name suggests, they’ll give you a mortgage rate in between your old rate and prevailing market rates if you apply for a new home loan.

This could lessen the blow of moving at a time when home prices remain near all-time highs and mortgage rates also hover close to 21st century highs.

Would You Be Willing to Move If Mortgage Rates Were a Little Bit Lower?

Glenville, New York-based TrustCo Bank has come up with a novel concept to get homeowners moving again, literally.

They’re offering below-market mortgage rates to existing home loan customers when they move into a new home.

The catch is that they have to pay off their old home loan, which likely carries a significantly lower interest rate.

The idea here is that the bank can get rid of a low-yielding mortgage while simultaneously giving their customer a more palatable mortgage rate in an 8% mortgage rate world.

It’s arguably a win-win situation for both bank and borrower, assuming the homeowner wants to move elsewhere.

The program works for TrustCo Bank because they’re a portfolio lender, meaning the loans they underwrite stay on their books after closing.

This contrasts the many nonbank lenders out there that originate loans and quickly sell them off to third-party investors.

And as you might suspect, banks holding billions in super-low-rate mortgages likely want to get rid of them as quickly as they can, as opposed to holding them to term.

So if they can give homeowners a little nudge, it could solve any duration mismatch the bank might be dealing with, where they’re lending cheap while bond yields skyrocket.

How the Split the Difference Mortgage Rate Program Works

As noted, you have to be an existing TrustCo Bank mortgage customer who is purchasing a new owner-occupied home to live in.

Let’s pretend you received your home loan from the bank a couple years ago when the 30-year fixed was averaging 3%.

You love your low rate, but you aren’t thrilled about your property. Or you simply want to move for one reason to another.

Enter the “Split-the-Difference” program, which considers your current rate, today’s rates, and gives you something in the middle.

To calculate this rate, first they subtract your rate (e.g. 3%) from prevailing market rates. We’ll call that rate 7.50%.

That gives us a difference of 4.50%, which is then divided by two to determine the split figure amount, or 2.25%.

This number is then added to your existing mortgage rate (3% + 2.25%) to come up with a split-the-difference rate of 5.25%.

If the rate happens to be an odd amount, it will be rounded to the nearest quarter percent. Unclear if that’s rounded both up and down though.

Regardless, as you can see a mortgage rate of 5.25% would be significantly better than a rate of 7.50%.

Is This a Good Deal for Existing Homeowners?

$500k Loan Amount Standard Rate
 Split-the-Difference
Interest Rate 7.50% 5.25%
Monthly Payment $3,496.07 $2,761.02
Monthly Savings n/a $735
Savings @ 60 months n/a $44,000
Balance @ 60 months $473,087.41 $460,747.39

On a mortgage with a $500,000 loan amount, we’d be talking about monthly savings of roughly $735.

Over a five-year period, that’s $44,000, and it would result in a lower outstanding balance due to the reduced interest expense.

Of course, you’d be giving up your old 3% mortgage in the process. But if you truly wanted/needed to move, it could be a favorable option versus other alternatives.

Still, you need to shop around to see what other banks could offer and you’d need to take a look at the closing costs involved.

One could also look into an adjustable-rate mortgage, assuming rates were similar/better and the closing costs lower.

But if you’re already a TrustCo mortgage customer, it’d be at least worth entertaining a rate quote to determine the potential savings.

As noted, they’re a portfolio lender that keeps the loans its originates. Don’t expect your average bank or mortgage lender to offer the same program.

Most mortgage companies don’t service their own loans, and thus do not have an interest in getting the old loan paid off ahead of schedule.

You’ve got to hand it to TrustCo though for getting creative at a time when mortgages have become a tough sell.

The bank primarily operates in the states of New York and Florida, with each state accounting for about half of total home loan production.

They funded nearly $1 billion in home loans last year, per HMDA data.

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

As if you needed more evidence that it’s not a good time to buy a home.

The latest piece comes from the WSJ, which revealed that renting is 50% more expensive than buying.

This comes on top of a recent Fannie Mae survey that said home buyer sentiment matched an all-time survey low, with only 16% indicating it was a good time.

The culprit continues to be mortgage rates, which surpassed 8% last week and continue to erode affordability.

So is it better to hold off and keep renting or continue to house hunt?

It’s Not Always a Good Time to Purchase a Home

First off, it’s not always a good time to purchase a home, or condo for that matter.

Ultimately, there are better times and worse times, at least if we’re framing the question in terms of investment returns.

There’s also the sheer matter of affordability, which could jeopardize the transaction long-term if the buyer isn’t able to keep up with payments.

That’s essentially what transpired in the early 2000s, when home buyers with no business buying homes went through with the transaction regardless.

Often, this involved some creative financing and perhaps some stated income underwriting to get to the finish line.

In the end, while they qualified for the loan and closed on the purchase, they often didn’t make it past the first few mortgage payments before they fell behind.

Today, the situation is different because many of those questionable loan types, like stated income loans and option ARMs, no longer exist.

You can thank the Ability to Repay/Qualified Mortgage rule (ATR/QM Rule), which was born out of the prior mortgage crisis.

It requires lenders to “make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan according to its terms.”

That’s good news because it means fewer unqualified home buyers are getting approved for mortgages.

And more homeowners have safer loan products, such as the 30-year fixed, as opposed to an interest-only loan or something else that’s potentially high-risk.

Affordability Is a Problem No Matter How You Slice It

While the existing stock of homeowners has never been better, thanks to those aforementioned rules and the low, fixed interest rates they hold, it’s a different story for prospective buyers.

Today’s home buyer is looking at an average mortgage payment that is 52% higher than the average apartment rent, per a CBRE analysis.

This is the worst premium since at least 1996, and even well above the prior housing market peak in 2006 when it stood at 33%.

If you look at the chart above, it’s basically all because of the sharp rise in mortgage rates, which increased from sub-3% levels to around 8% today in less than two years.

That’s unprecedented movement, even if rates remain below 1980s mortgage rates. The bigger takeaway is the speed at which rates climbed higher.

We’re talking a near-200% increase in rates in less than 24 months. Meanwhile, home prices haven’t come down, thanks to a dearth of supply.

And a phenomenon known as the mortgage rate lock-in effect, where existing homeowners with 2-3% mortgage rates feel trapped.

Or are simply unwilling to move and take on a much higher interest rate.

Taken together, we have the worst home buying affordability in 30+ years history.

That buy versus rent premium is also up from 51.1% during the second quarter and 45.3% a year ago.

Again, this is largely due to higher mortgage rates, which have continued to climb higher throughout the year thanks to a stronger-than-anticipated economy.

It Now Takes Over a Decade to Break Even on a Home Purchase

Thanks to the big price tag on a home purchase these days, combined with high mortgage rates, it now takes over a decade to break even, per new data from Zillow/Axios.

The typical home buyer who puts down 3% on a $376,000 home purchase with a 7.045% mortgage rate won’t reach this point for 13.5 years.

This assumes a typical increase in home values, 3% closing costs, 1% in home maintenance fees, along with 6% closing costs and 6% agent commissions paid at time of sale.

In other words, you won’t be able to turn a profit until you’ve been in it long enough to whittle down the balance to offset all the associated costs.

Using that same purchase price, the loan balance would be about $285,000 after 13.5 years of regular monthly mortgage payments.

If the mortgage rate was 3%, the balance would be roughly $240,000 at that time because a lot more of each payment goes toward principal.

Someone who puts 20% down on a house can break even a bit sooner, at around 11.3 years, which is still about double the five-year timeline.

What does this say. That maybe it’s not a great time to buy a home, at least from an investment standpoint.

See: Rent vs. buy calculator

Should You Wait to Buy a House?

At this juncture, I don’t think anyone would call you crazy for pumping the brakes on a home purchase, though everyone has different reasons for buying.

And over time when you bought can matter less, assuming you stay the course (ask the 2006 home buyers who still own).

Aside from housing affordability being at multi-decade lows, the available inventory of homes is also quite poor.

Simply put, there isn’t a lot to choose from at the moment, and affordability stinks to boot.

At the moment, there are only about 2.5 months of supply at the existing sales rate, about half the normal 4-5-month level of for-sale inventory, per Redfin.

So despite the horrible lack of affordability, home prices are holding up just fine. In fact, the median sales price is up 1.9% from a year ago.

In other words, if you’re a prospective home buyer today, you might be looking at slim pickings, intense competition from other buyers, and an 8% mortgage rate.

That sure doesn’t sound like favorable home buying conditions.

Those who bought last year and more recently may have been told to marry the house and date the rate.

The argument is the house can be yours forever but the interest rate doesn’t have to be. The problem is mortgage rates have continued to go up.

So that advice hasn’t panned out so well for those who bought banking on refinancing to a lower rate by now.

This means if you do buy a home today, you need to be prepared to pay the mortgage rate you’re given.

Not a temporary buydown rate or a potentially lower rate in the future that may not materialize.

One compromise might be a hybrid adjustable-rate mortgage, which is fixed for the first five or seven years.

By then, hopefully mortgage rates drift over. If you believe the forecasts, they’re actually expected to drop by 2024. But that’s subject to change. And there’s still the question of just how much.

One worry along these lines is lower mortgage rates could be accompanied by lower home prices. And that could make it difficult to refinance if the mortgage is underwater.

In other words, if you buy today, you better be able to afford it. And you better really like the house.

Read more: 10 reasons to buy a house other than for the investment

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

The nation’s largest home builder, D.R. Horton, also has its own affiliated mortgage lender known as “DHI Mortgage.”

Recently, new home sales have surged in popularity due to the mortgage rate lock-in effect.

Essentially, existing homeowners aren’t selling their properties because they’ve got ultra-low fixed interest rates on their home loans.

At the same time, mortgage rates have surged higher, resulting in big financing incentives from home builders to move their newly-built home inventory.

Let’s take a hard look at what DHI Mortgage has to offer and whether an in-house lender is the way to go.

DHI Mortgage Fast Facts

  • Full service mortgage lender offering home purchase loans and refis
  • Founded in 1997, headquartered in Austin, Texas
  • Parent company D.R. Horton is the nation’s largest home builder
  • Publicly traded company (NYSE: DHI)
  • Also operate DHI Title and D.R. Horton Home Insurance Agency
  • Aim to be a one-stop shop for newly-built home buyers
  • Funded roughly $20 billion in home loans during 2022
  • Most active in the states of Texas, Florida, and California
  • Licensed to do business in 34 states

DHI Mortgage is a full-service mortgage lender owned by parent company D.R. Horton.

They were founded in 1997 and are headquartered in Austin, Texas.

D.R. Horton is the largest home builder in the United States, slightly bigger than competitor Lennar, which also has a captive mortgage company called Lennar Mortgage.

The home builder got its start back in 1978 when Don R. Horton built his first home in Fort Worth, Texas.

Since then, the company has grown into a near-$35 billion dollar company that is publicly-traded on the New York Stock Exchange (NYSE: DHI).

The company’s shares are owned by legendary investor Warren Buffett, who sees strength in home building given the lack of existing home supply.

Aside from operating their in-house mortgage lender DHI Mortgage, they also run an affiliated title company and insurance agency.

This means home shoppers can use DHI Title for their title insurance needs and D.R. Horton Home Insurance Agency for their homeowners insurance, assuming it’s competitively priced.

The goal is to create a one-stop shopping experience for home buyers and streamline what is often a daunting process.

Last year, they funded about $20 billion in homes, with nearly 30% of overall volume coming their home state of Texas, per HMDA data.

They are also quite active in Florida, California, Arizona, Georgia, Nevada, and The Carolinas.

How to Apply with DHI Mortgage

While you can get pre-qualified for a mortgage online via the DHI Mortgage website, they say to get in touch with your mortgage loan originator to submit a full loan application.

It’s unclear if this means you can still apply electronically after speaking with a loan officer, or if you have to apply in-person.

They do have branch locations and sales offices at their home builder developments, which could facilitate this process.

Unfortunately, their website is a bit limited when it comes to information, so you’ll probably need to speak with a human before proceeding to an application.

Their online system, powered by fintech company Blend, does seem to allow for online refinance applications along with the pre-qualifications.

If you visit their website, it’s also possible to search for a local loan originator by state, branch, or by name.

They say they have digital options for buyers, but don’t make clear what those are. My assumption is they do offer some sort of online loan submission process.

And likely the ability to complete tasks electronically, whether it’s satisfying loan conditions or checking loan status.

However, I would like to see more information in this department.

Loan Programs Offered by DHI Mortgage

  • Home purchase loans
  • Refinance loans
  • Conventional loans including Fannie/Freddie 3% down
  • FHA loans
  • VA loans
  • USDA loans
  • Fixed-rate and adjustable-rate options
  • Temporary buydowns
  • Affordable housing loans

DHI Mortgage offers the most popular loan options out there, whether it’s 3% down conforming loan backed by Fannie Mae or Freddie Mac or an FHA loan.

You can get both a home purchase loan or a mortgage refinance, though I doubt many existing homeowners would use them for a refinance unless mortgage rates were ultra-competitive.

The full menu of government-backed mortgages is offered, including FHA loans, VA loans, and USDA loans.

And both fixed-rate and adjustable-rate options are available, including the 30-year fixed, 15-year fixed, 7/1 ARM, and 5/1 ARM.

They also appear to offer jumbo loans that exceed the conforming loan limit in pricier regions of the country.

However, they don’t appear to offer any second mortgages, such as HELOCs or home equity loans.

But temporary buydowns, such as 2-1 buydown, are offered, as well as other affordable housing loans if buying in specific locations or with low-to-moderate income.

DHI Mortgage Rates

Speaking of mortgage rates, DHI Mortgage doesn’t have a page on their website dedicated to rates or lender fees for that matter.

So you’ll be a little bit in the dark there. Be sure to ask your loan originator what fees they charge, such as loan origination fees, application fees, processing and underwriting, etc.

The good news is I did see special interest rate offers on the D.R. Horton website, which is typical of home builders.

They often offer special incentives to their home buyers who also use their affiliated lender.

In this case, I saw a 5.50% fixed rate FHA loan offer, which was also available on VA and USDA loans.

And a 5.75% fixed rate conventional loan offer that only required a five percent down payment.

So chances are they can offer some pretty competitive rates if you buy a D.R. Horton property and use DHI Mortgage.

DHI Mortgage Home Buyers Club

Those with imperfect credit can take advantage of the “DHI Mortgage Home Buyers Club.”

It pairs in-house credit consultants with prospective home buyers to prepare them for homeownership.

While it doesn’t guarantee loan approval or improved credit scores, they will work with you to boost your overall credit profile.

They’ll also ask you to complete a HUD-approved homebuyer education course while your credit consultant comes up with a credit profile improvement strategy.

This might entail removing inaccurate items on your credit report, paying down high balances, and getting current on any past due accounts.

The goal is to clean up your credit history and improve chances of mortgage approval, and potentially snag a lower mortgage rate depending on credit score improvement.

DHI Mortgage Reviews

As always, I try to track down customer reviews online to see what past customers think of the lender in question.

And they don’t appear to be great, based on what I could find. Their headquarters in Austin has a 2.6/5 rating from about 40 Google reviews.

Over at WalletHub, it’s a similar 2.6/5 rating from just over 30 reviews, with some customers citing poor communication and delays.

You can also find reviews for individual loan officers if you go on Zillow and search by name or location.

DHI Mortgage currently has a ‘B+’ rating with the Better Business Bureau (BBB), which isn’t fantastic and likely due to customer complaints.

They also have a 1.14/5 rating on the BBB website based on customer reviews.

To sum things up, their website could do with improving and their mixed reviews raise some questions about customer service.

On the bright side, they offer a good amount of loan programs and might have financing specials that beat out the competition.

Ultimately, it would probably come down to price if deciding between them and a different lender.

Though I assume most DHI Mortgage customers are also likely D.R. Horton home buyers, so there will likely be a big push to stay in-house.

Just be sure to speak with other mortgage companies, independent mortgage brokers, and so on to weigh your options.

Convenience is great, but not at the price of higher closing costs and/or interest rates. So definitely shop around.

Lastly, note that DHI Mortgage sells most of the loans it originates, meaning it’s likely your loan will be sold and transferred to a new loan servicer shortly after closing.

DHI Mortgage Pros and Cons

The Good

  • Special financing incentives to D.R. Horton home buyers
  • Might be a quicker/easier home buying process using affiliated companies
  • Branch locations allow borrowers to work with in-person if preferred
  • DHI Mortgage Home Buyers Club helps credit challenged buyers
  • Free mortgage calculator and homebuyer education resources online
  • Lots of loan programs to choose from including fixed-rate loans and ARMs

The Perhaps Not

  • Only licensed in 34 states
  • No mention of mortgage rates or lender fees online
  • Clunky website with limited information
  • Don’t seem to able to apply for a home loan electronically
  • Do not offer second mortgages or home equity products
  • Do not service the majority of their loans
  • B+ BBB rating and poor customer reviews

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

If you’ve been keeping track lately, you might be wondering why mortgage rates plunged this week.

Last week was a totally different story, with a hotter-than-expected jobs report almost enough to push the 30-year fixed across the daunting 8% threshold.

But then the unexpected happened over the weekend, as is often the case with geopolitical events.

In times of uncertainty, bonds are typically a safe haven, and when demand for them rises, their associated yields (or interest rates) fall.

This, coupled with some more dovish talk from Fed speakers, might explain the recent pullback in rates.

How Much Have Mortgage Rates Plunged?

First off, the word “plunge” might be a strong one given how much mortgage rates have climbed over the past 18 months.

While mortgage rates have indeed fallen all week, they remain well above recent lows. And even much higher than levels seen this summer.

If we want to use MND’s widely cited daily rate survey as the measure, the 30-year fixed now stands at 7.60%.

That’s down from 7.81% on Friday October 6th. So basically mortgage rates have improved by about 20 basis points, or perhaps .25% depending on the lender.

It also reduced the year-over-year change in rates from 0.77% to 0.46%, providing a glimmer of hope that the worst could be behind us.

And better yet, perhaps mortgage rates have peaked. While that remains to be seen, it’s been hard to get any meaningful relief lately.

Typically, any pullback or improvement in rates has been met with further increases. And the wins are generally short-lived.

Will that be the case again this time or is there finally light at the end of the tunnel?

Mortgage Rates Helped by New Geopolitical Risks

As for why mortgage rates improved this week, one would be quick to point to the events that took place in Israel (and continue to unfold).

Generally, mortgage rates tend to go down if there is the threat of war or similar tension in the air.

The reason is uncertainty, which is a friend to bonds because of their relative certainty.

In short, investors will flee riskier markets like equities and pile into bonds, which is known as the flight to safety.

If more investors are buying bonds, the price goes up and the yield drops. Since Friday, the 10-year bond yield has fallen from 4.84 to about 4.61 today.

Of course, this could prove to be a short-term reaction to what has been a clear move higher for bond yields lately.

So it’s entirely possible that the 10-year yield marches on back to those recent levels (and beyond) depending on what transpires.

And the conflict in the Middle East could actually exacerbate inflation if oil prices (and gas prices) rise.

No More Fed Rate Hikes Could Take Pressure Off Mortgage Rates

Another factor related to the recent mortgage rate plunge has been some dovish talk from Fed officials.

Atlanta Fed President Raphael Bostic came out this week and basically said no more interest rate hikes were needed.

The Fed has already raised its key policy rate 11 times since early 2022, pushing mortgage rates up along with it.

But Bostic “told the American Bankers Association that Fed policy is sufficiently restrictive.”

Additionally, he said rate cuts could even be in the cards “if things get ugly in the Middle East.”

“You can pretty much count on the Fed taking that into its world view and that’s only going to be lower rates.”

Earlier in the week, Dallas Fed President Lorie Logan said higher bond yields could do the heavy lifting for the Fed, requiring no additional tightening on their part.

And Fed Vice Chair Jefferson made comments that suggested he was in favor of pausing the fed rate hikes.

Interest rate traders have taken that to mean that the Fed rate hikes could be over, and the next move might be lower.

Per the CME FedWatch Tool, that cut could come by the June meeting, based on the current odds.

Though if the situation worsens in the Middle East, cuts could materialize even earlier in 2024.

As it stands now, another rate hike looks exceedingly unlikely, while a rate cut appears to be coming sooner-than-expected.

Now it’s important to note that the Fed doesn’t control mortgage rates, but their long-term outlook can have an effect on mortgage rates.

Fed Clarity Can Lower Bond Yields and Narrow the Spread

Additionally, more clarity from the Fed could go a long way in fixing the spread between 10-year bond yields and mortgage rates.

It’s currently about double its usual amount, at around 300 bps vs. 170. Knowing the Fed’s position on monetary policy could normalize spreads.

If we assume the 10-year bond yield settles in at current levels of say 4.50%, adding a more typical spread of 200 bps puts the 30-year fixed back to 6.50%.

That would spell relief for many prospective home buyers, who might be facing mortgage rates as high as 8% depending on their individual loan attributes.

Factor in paying mortgage points at closing, and it’s possible home buyers could obtain mortgage rates back in the high-5% range.

That would likely be good enough for now to get transactions flowing again, and potentially unlock some existing homeowners trapped by so-called mortgage rate lock-in.

Just beware that the trend has not been friendly to mortgage rates for a long time, and things can easily reverse course again depending on what transpires.

While it might signal a turning point, mortgage rates can also remain stubborn at these levels without significant economic data pointing to lower inflation.

And tomorrow’s CPI report alone could completely reverse the big move lower over the past couple days.

So while we’ve gotten some relief over the past few days, this so-called mortgage rate plunge may easily unwind if more hot economic data comes in. Or if global tensions ease.

(photo: Pussreboots)

Source: thetruthaboutmortgage.com