It feels as if mortgage rates have found a comfortable range to move back-and-forth in, for now. Let’s talk about mortgage rates, how they change, and why I feel as if they’ve “found a range.”
Mortgage rates may change everyday. Sometimes they may change more than once per day. Mortgage rates behave differently then other rates. For example:
the Federal Funds Rate remains static unless it is changed by the Federal Reserve (and wow, it has changed a lot over the past year).
Prime Rate moves based on the Federal Funds Rate. It doesn’t change unless the Feds make a move.
Savings/CD rates typically increase/decrease on the Federal Funds Rate changes too.
From those examples, it is easy to see how the Federal Reserve and their Federal Funds Rates drives a lot of the rates out there (I didn’t even get into credit card and car rates). Mortgage rates move on a daily basis. Their values (up or down) move more like stocks on a day to day basis… some days they go up a bit, then down a bit, and sometimes up and down in the same day.
Mortgage rates move on bond values. As those values change, so do mortgage rates (and as previously stated, change day to day and sometimes more than once a day).
With the knowledge mortgages rates do not behave like other rates and can change often, they usually find a comfortable “range” to float and up and down in until something (economic data, recession, high inflation) moves them out of it.
I feel the mortgage rate range is moving in the low to high 6s… say 6.25-6.75. Why am I making this statement? When mortgage rates went over 7% several months ago, they immediately began to improve. When rates touched a little under 6% not so long ago, they immediately got worse. In both directions, they changed pretty quickly until they feel back into this 6.25-6.75% range and then slowly moved back and forth.
Which puts us… in the 6s for now. If the economy does enter a recession, expect mortgage rates to improve and move under 6%. If inflation jumps back up, expect rates to get into the 7s again. Depending on who you read, there is talk of inflation stagnating/not improving along with many saying a recession is right around the corner. It feels as if a lot can happen in 2023.
So here we are, possibly in the 6.25-6.75% “eye of the economic storm” for 2023.
The Mortgage Bankers Association (MBA) has officially requested that the Federal Housing Finance Agency (FHFA) expand income eligibility for certain low down payment loan programs. FHFA regulates mortgage giants Fannie Mae and Freddie Mac. The MBA sent a letter to FHFA specifically requesting changes to the Home Ready and Home Possible loan programs.
Home Ready and Home Possible currently provide interest rate pricing discounts and mortgage insurance premium discounts for borrowers whose incomes are less than 80% of the Area Median Income (AMI) where the subject property is located. These discounts apply to home buyers whose credit scores are 680+ and who complete a free online home ownership course. Lender pricing typically adjusts interest rates higher for borrowers with lower credit scores and those who are financing condos using loan amounts greater than 75% of the condo’s value. For Home Ready and Home Possible borrowers, these credit score and condo pricing adjustments are eliminated. Making these programs even more powerful is the fact that the discounts apply to borrowers who can make only a 3% down payment.
Saving enough cash for a down payment is one of the greatest challenges that homebuyers can face. Providing these interest rate and mortgage insurance discounts for loans with only a 3% down payment is a powerful tool for homebuyers without alot of available cash.
In the letter to FHFA, MBA requested that the agency expand Home Ready / Home Possible eligibility to borrowers with incomes up to 100% of the subject property’s AMI. MBA also requested that the income threshold be eliminated completely in low-income census tracts. This change would encourage homebuyers to seek properties in low-income areas. MBA president and CEO Robert Broeksmit stated, “Raising the AMI limits to expand access to these programs would still be beneficial as there are key features of Home Ready and Home Possible loans, such as a 3% down payment, that make homeownership attainable for historically underserved borrowers.”
I think an increase is warranted. When you look at 80% of the average income in an area versus the average home price, it eliminates many borrowers from qualifying for these programs. For example, in DeKalb County, the Home Ready / Home Possible annual income limit is $76,560. Some first-time buyers may qualify to buy an average-priced home, if they have no additional debt, but it is tight. By allowing the amount to go to 100%, more borrowers would qualify to purchase the average home price in the market with some additional debt. This is important as most first-time home buyers are in the Millennial/Gen Z demographic. These generations have additional student loan debt that previous generations didn’t have. Raising the income threshold to 100% AGI isn’t about buying more home. It is allowing first-time home buyers to purchase the average home in their area while having some additional debt obligations. If these programs are intended to help first-time home buyers, then let’s help them.
For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.
In recent weeks, mortgage giants Fannie Mae and Freddie Mac have announced changes that will give better interest rate pricing to specific borrowers. A quick primer on interest rate pricing….lenders price loans based on risk factors. The greater the risk, typically the higher the interest rate. Key risk factors that can impact mortgage interest rates are:
Credit score – the lower the borrower’s credit score, the greater the default risk, and therefore the interest rate is adjusted higher to compensate for the risk.
Down payment – the lower the down payment, the greater the risk and therefore the interest rate is adjusted higher.
Condominium – lenders consider condos to be riskier properties due to potential issues with the HOA. So the interest rate for a condo loan with a less than 25% down payment is adjusted higher.
In the mortgage industry, we call these “Loan Level Price Adjustments” or LLPA’s. Given that background, here are the recent changes that will help some borrowers.
Removal of the LLPA’s for first-time home buyers whose income is 100% or less than the Area Median Income (AMI) for their home purchase location. First-time home buyers include anyone who has not owned a home in the last three years. The AMI differs by geographic area, but a quick check of a southeast Atlanta address shows an AMI of $95,700. One caveat is that if the borrower’s qualifying credit score is less than 680, the interest rate will be adjusted higher to compensate for the additional credit risk. I think this new program is great news for potential home buyers who qualify. The biggest benefits will accrue to qualified borrowers with credit scores between 680 and 700 who want to buy a condo with a low down payment.
Another recent change affects the Home Ready / Home Possible programs offered by Fannie and Freddie. In the past, these programs removed the LLPA’s for borrowers who qualified: (i) credit score of 680 or higher, (ii) income less than or equal to 80% of the AMI ($76,560 in the area mentioned above), and (iii) down payment of less than 20%. These programs offer improved interest rate pricing and discounted mortgage insurance premiums for qualified borrowers. For these programs, the borrower does not have to be a first-time buyer. The recent change was eliminating the down payment requirement. I’ve had past customers who wanted to put 20% down, but who qualified for better pricing with a 19.5% down payment. With the change, borrowers making a 20%+ down payment will still obtain the discounted pricing if they meet the other program requirements. Note that these programs require the borrower to complete a free online homeownership course.
One other recent change that may help some borrowers is that Fannie and Freddie will now allow the use of cryptocurrency assets to cover a borrower’s down payment and closing costs. Before now, cryptocurrency assets were not allowed. To use cryptocurrency, the borrower must move the assets to a bank account (checking or savings) prior to closing and must provide documentation showing that the borrower legitimately owned the crypto assets and documenting the transfer from the crypto account to the bank account.
For reasons covered in a recent Mortgage Blog post, now is a great time to buy a home. And if you qualify for the new discounts or you have crypto accounts, the situation just got better for you. If you want to buy a home in Georgia, give me a call and we can quickly determine which discounts you can obtain, and then set you on a path to home ownership.
The most exciting mortgage news from the week before Thanksgiving was the significant drop in mortgage interest rates. Official reports show rates improved almost one-half of one percent. I actually had a client whose rate improved by five-eighths (0.625) of one percent. That is a significant impact on home affordability and I hope that trend continues.
Many people wonder how mortgage interest rates can decrease when the Federal Reserve has been consistently raising the Federal Funds rate in recent months. As discussed in a recent Mortgage Blog post, mortgage rates are not directly linked to the Federal Funds rate. The Fed most directly influences mortgage rates using purchases of mortgage bonds. Now that the Fed is not buying mortgage bonds to lower interest rates (called quantitative easing), other economic factors naturally impact mortgage rates.
One of the most important economic influences on mortgage rates is inflation. When inflation trends higher, mortgage rates tend to increase as well. It’s no surprise that without Fed mortgage bond purchases keeping mortgage rates low, the recent high inflation numbers have caused mortgage rates to rise rapidly.
In mid-November, published data was positive – inflation is still high but the inflation rate cooled from prior months. Freddie Mac’s chief economist noted that mortgage rates decreased due to data “that suggests inflation may have peaked.”
This good news does not mean that the period of relatively high mortgage rates has ended nor does it indicate a trend of declining mortgage rates. That will all depend on future inflation report data. But the good news is that when mortgage rates hit the 7% level, they quickly moved lower. Hopefully that 7% level will remain the ultimate ceiling for mortgage rates.
Are you (or perhaps someone you know) looking to buy a home in Georgia? With the recent drop in mortgage rates and current sellers’ willingness to negotiate contract terms (such as price and closing cost contributions), right now could be the best time in almost two years to buy a home. Give me a call and we can get you fully underwritten with a TBD address so you can make an aggressive offer, giving you strength to negotiate contract terms in this more favorable market.
A recent article in the Wall Street Journalgave an interesting explanation for 2022’s rapid rise in mortgage interest rates. Most people think mortgage rates have risen because the Federal Reserve has increased the Federal Funds rate several times this year. Not exactly. Here’s quick evidence of that. The first mortgage I closed in 2022 had an interest rate of 3.00%. On March 15, I locked the rate for a new loan at 4.375%. The first time the Fed raised the Federal Funds rate was on March 16.
What caused mortgage rates to rise? In short, it’s economics 101 – supply and demand. In this case, the product involved is mortgage-backed securities. The vast majority of mortgages originated are sold to Fannie Mae and Freddie Mac. Fannie and Freddie package the mortgages into mortgage-backed securities (MBS) and sell the MBS to investors – insurance companies, pension funds, mutual fund managers, etc. Economic factors generated by the pandemic and then its fading created supply and demand shocks that first caused mortgage rates to drop, and then recently caused rates to rise.
When the pandemic first hit, the Fed began buying large quantities of MBS to hold in its portfolio. The increased demand for MBS pushed the security prices up but that inversely pushes the interest rates down. This process is known as “Quantitative Easing.” Banks also bought large amounts of MBS. Americans began saving more during the pandemic. Bank deposits increased significantly while consumer and business borrowing decreased. Since banks had an excess of cash, they decided to buy MBS and put their excess cash to work. So during the pandemic, the Fed and major banks combined to purchase over $1.5 trillion of MBS.
This cannot go on forever, so the Fed began backing off their MBS purchasing in November 2021 and completely stopped in February 2022 – right before rates began rising rapidly. In fact, my colleague discussed this in a January 2022 mortgage blog post. In addition, the 10 largest bank holders of MBS have reduced their MBS holdings by $133 billion in the first 3 quarters of 2022, as bank deposits have leveled off and customer borrowing has increased, leaving less excess cash to buy MBS.
Ultimately, the demand for MBS has dropped significantly now. To motivate other buyers to purchase MBS, the market has forced interest rates much higher. The effect has been dramatic. In recent weeks, mortgage lenders have charged 7.00% or more for 30-year fixed mortgages that had a 3.00% rate to start 2022.
Next time someone tells you they are holding off on a home purchase to see if the Fed raises rates in the coming months, tell them it’s not that simple. Then connect them with me. Mortgage rates are higher, but I still have clients who have saved money with a home purchase compared to the very high current market rents.
Last week I mentioned inventory levels are higher now than they were a year ago. This is true, yet numbers can be deceiving. The Jacksonville Jaguars tripled their win total from 2020 to 2021. Sounds good, but if you only win one game in 2020, it is still a tough year with just three total wins the next season!
Our inventory story is similar. Yes, inventory levels were up 27% compared to a year ago. The reason they were up so much is that inventory levels were so incredibly low a year ago. In addition to the fear of not finding their next home, now there is another reason current home owners are reluctant to list their homes.
With mortgage interest rates going as high as 7 percent this year, a growing number of homeowners are reluctant to sell because they have a lower rate on their current mortgage. The historically low interest rates we saw in 2020 and 2021 is keeping many homes on the sidelines.
There are some stories out there about home values dropping. As with most things, what does the local Georgia picture look like?
Sure, prices have fallen in some markets. In Georgia, values thus far have remained stable. In a time where the number of purchases is slowing, the low supply of homes is keeping home prices relatively high – simple supply and demand.
For those who already own a home, this is good news. You are likely to have seen the home noticeably appreciate while enjoying a low interest rate. For individuals who do not already own a home, homeownership is moving further out of reach for some as rising rates, elevated home prices and the persisting housing shortage make buying a house more expensive.
Eventually this trend will change. The number of homes sold in 2014 was also low, yet the housing market saw a boom in 2015-2016 in terms of a jump in sales. After years of not buying a home, the market went into overdrive. A similar thing will happen in the current environment too. Homeowners may be reluctant to sell with higher rates, but they will need a new home for changing needs… have a lot of equity in their current home… and jump into the market to use their equity on a new home purchase.
The question is “when” will this happen? The housing market was booming until about June 2022, and then it shut off – seemingly overnight! The ramp up will also be quick – when it happens. This is why buy a home now will be easier due to less competition out looking for homes. I’ve said it often lately, and I’ll say it again… finding the right home is hard. Refinancing to a lower rate later is easy. The experience of buying a home now in a higher interest rate market should be more “enjoyable” than when everyone decides it is time to move.
Ready to own a home in Georgia? If yes, contact me today (see my banner above for contact info). We can get started in just a few minutes and get you pre-approved for the offer on your new home!
2022’s rapid increase in mortgage rates has been dramatic and impactful. Many potential home buyers have stopped searching because rising rates have driven home payments to uncomfortable levels. Interest rates have risen about 4% this year, starting at around 3% in January and rising to around 7% now (for a 30-year fixed rate mortgage.)
People often ask me where interest rates will go in the future. After my initial smart aleck answer, “If I could predict the future, I would be sitting on a tropical beach somewhere enjoying retirement.” I tell people it’s impossible to accurately predict where mortgage rates will go. There are too many variables that can impact rates unexpectedly. Statistical experts in analysis with access to troves of research data disagree on where the economy and rates will go, almost all of the time. And now is a great example with respect to mortgage rates.
Here’s a link to an article (dated October 24, 2022) reporting that the Mortgage Bankers Association (MBA) predicts that mortgage rates will drop to 5.4% by the end of 2023.
And here’s a link to an article (dated October 21, 2022) reporting that a financial advisory firm predicts that mortgage rates will rise above 10% in 2023.
Here’s another article (dated October 17, 2022) stating that mortgage rates could reach 11.6% by October of 2023.
And finally, for balance, here’s an article (dated August 29, 2022) stating that Fannie Mae predicts mortgage rates will fall to 4.5% in 2023.
The bottom line is that experts do not agree on their interest rate forecasts, and that makes it tough for home buyers to plan. Here’s the good news, for those who find a home they love and can afford the payment, experts say they are likely better served to buy now rather than wait. If interest rates go higher, someone who buys now has locked in a lower rate and will thus have a lower payment than if they had waited. And if interest rates drop, as some experts predict, people who buy now can refinance their mortgages to lock a lower rate, when that happens. With less competition for available homes now, buyers may be able to negotiate a deal that would have been impossible just a few months ago.
Interest rates frequently cycle up and down. If you or someone you know finds the home they love in Georgia and they want to buy now, connect them with me. Dunwoody Mortgage can get them a competitive interest rate now. If future rates are higher, they are protected. If future rates decrease, I’ll call them and let them know when refinancing will make good financial sense.
We all know rates of all types have moved higher. It is all over the news, savings accounts at banks are paying more interest to the account holders, car loan rates are up, home loan rates are up, and the housing market has slowed… yup, rates are higher.
So now what?
Last week I mentioned how the housing market is returning to historical norms. Well so too are mortgage rates. Take a look at mortgage rates over the past 50 years:
Even with a rate in the 6% range, rates are still lower than the historical average since the 1970s. I do not mean to sound flippant. I know it is a struggle when would be buyers have lost 20% of their purchasing power this year due to higher rates. I know it is hard out there.
We are accustomed to lower rate as they’ve been pretty low since the housing crash in 2008, and it is hard transitioning to where rates are today. So this is what I am telling clients now as we navigate higher interest rates – the home is long term. Interest rates are not.
Find the right home and buy it, own it, and live in it. While double digit annual appreciation is gone, homes still appreciate in value. Even when we saw the housing crash, home values came back (and a big crash like that has only happened twice… once during the Great Depression in the 1930s and the other from the housing crash).
Rates change and fluctuate. Look back at the chart in this post. Year over year, rates move up and down. I’ve owned two homes in my life and I’ve refinanced each of the homes (one of the homes I refinanced twice).
For roughly two years people were willing to go way over asking price, waive all contingencies and home inspections, offer to cover appraisal gaps, etc. Now homes are going at (and sometimes less than) their list price. There is less competition out there looking to buy. Sellers are giving money for closing costs, and buyers have contingencies and protections in their contracts again.
Yes, rates are higher, but buying a home is easier now than it was just a few months ago! Finding the right home is hard and a long term decision. The interest rate isn’t permanent and one can refinance to a lower rate to take advantage of a rate dip, and it will happen at some point in time.
When comparing the two, finding the right home is hard; whereas getting a new interest rate is easy.
For those looking to buy a home in the state of Georgia , contact me today to get started. I can have you well on your way to being ready to own your new home.
A recent Zillow study shows the significant impact of lower credit scores on mortgage payments. The study showed that a home buyer with a 760+ credit score would pay about $288 less per month as compared to a buyer with a 620 – 639 credit score, when buying the same priced home. My professional experience confirms Zillow’s ultimate conclusion – that borrowers with the highest credit scores obtain the lowest interest rates and mortgage insurance premiums, which means they pay a lot less for the same mortgage.
You may then wonder, “What factors affect my credit score and what can I do to improve it?” Here are the five major criteria and their weights used to calculate a person’s credit score:
Payment History (35%) – Lenders are most concerned about whether or not someone pay their bills on time. The best indicator of this is how that person has paid their bills in the past. Paying bills on time, every time, will give the best scores in this component. Derogatory items such as late payments, collections accounts, bankruptcies, etc. will lower this part of the score. Derogatory items have less impact the older they are.
Debt Level (30%) – This is also called debt utilization. It is primarily used with credit card accounts. This component measures how much of a person’s available credit has actually been used. The best scores in this category are given to people who have used less than 25% of their available credit. So if you have a card with a $10,000 limit, you get the best score from this component by keeping the account balance at $2,500 or less.
Length of Credit History (15%) – Longer credit histories are better than shorter histories, as such histories give a better picture of a person’s payment habits.
Inquiries (10%) – An inquiry occurs when a lender (like me) runs a credit report. An inquiry indicates that a person is considering increasing their personal debt. Each inquiry lowers the credit score slightly. The more recent the inquiry, the more effect it has on the score.
Mix of Credit (10%) – Having different kinds of credit accounts (credit cards, auto loans, student loans, mortgages, etc.) improves the score because it shows that a person has experience managing payments on different types of credit.
Interesting Facts About Credit Knowledge
Here are some additional professional observations. A person can make mistakes / decisions that lower the credit score quickly. It typically takes a long time to earn back a good score once it has dropped due to late payments, other derogatory items, or identity theft. Avoid late payments if at all possible.
Do you want to buy a home in Georgia but worry about the impacts of your credit score? Dunwoody Mortgage has a credit analyzer tool that can help some clients increase their scores within a short time. Some of my clients have improved their scores by over 40 points quickly. This improvement had a great positive impact by lowering their interest rates and monthly payments. Call me to start the process and we will determine if we can help you too.
A recent Wall Street Journalarticle covered some ways homebuyers are responding to rapidly rising interest rates. Since mortgage interest rates have risen to their highest level in more than a decade, more home buyers are now (1) paying discount points at closing to “buy” a lower interest rate and (2) obtaining adjustable-rate mortgages (ARMs) that have lower interest rates in their early years.
The Mortgage Bankers Association reports that ARM applications have doubled over the last three months. ARMs are mortgages with interest rates that can vary over the term of the loan. Borrowers can obtain fully amortizing (meaning each payment includes principal and interest) ARMs with terms of 15 years, 30 years, or other terms similar to fixed rate mortgages. Here are some key terms and details about how ARMs work.
Index – The mortgage’s variable interest rate is based on a widely available published rate. For example, some loans use the “30 Day Average SOFR” rate. “SOFR” stands for Secured Overnight Financing Rate. You can look this rate up online and easily find the 30-day average. Calculating the actual interest rate starts with the Index as the basis.
Margin – ARM rates are typically defined as a certain percentage over the index. For example, the margin could be 3.5%. If the index is 1% and the margin is 3.5%, the initial interest rate for the loan will be 4.5%.
Initial Adjustment Period – The initial interest rate is fixed for a specific period of time. After that time, the interest rate can adjust based on market conditions. The initial period is the first number of an ARM description. For example, a 5 / 1 ARM will have an initial fixed rate for the first five years. A 7 / 6 ARM will have an initial fixed rate for the first seven years.
Subsequent Adjustment Period – After the initial interest rate adjustment, future adjustments can happen more frequently. The subsequent adjustment period is the second number of an ARM description. For example, a 5 / 1 ARM will adjust every one year after the initial rate adjustment. A 7 / 6 ARM will adjust every six months after the initial rate adjustment.
Caps – There are caps or limits on how much the interest rate can change over the life of the loan. The initial cap is the limit on how much the rate can change on the first adjustment. The subsequent cap is how much the rate can change on any single adjustment after the first one. There is also a lifetime cap which sets a maximum interest rate for the life of the loan. For example, the ARM I have in process now has a 2% initial cap, a 1% subsequent cap, and a 5% lifetime cap.
Looking to buy a home in Georgia but frustrated with the current high interest rates? Please give me a call and we can discuss whether an ARM could be a wise choice for you.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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