Deal Finder: Mortgage Rate Basics for Homebuyers and Homeowners
Mortgage rates, along with other interest rates, have been on an upward climb for months due to inflation and other economic factors. It’s important to know the basics about mortgage rates and to seek the help of professionals so you can find a deal and save money in the long run.
Skin Edge, a loan originator at Fairway Independent Mortgage in Newnan, shares his expertise with homebuyers and homeowners in the below Question-and-Answer interview on how to navigate the current real estate market and find the best mortgage rates. With 10 years of experience, Edge mostly works on the financial side of real estate, helping homebuyers to get prequalified for home loans and determining how much they can afford.
Q: Will mortgage rates go down this year?
A: They’re trending lower. Mortgage rates are always going to follow inflation. We all know inflation has gotten a little out of hand in the last 18 months, but with the Fed raising their rates, it’s slowly, but surely trending downward. As we speak right now, rates are as low as they’ve been in 2 months. I’ve seen prognostications that by summer, or the end of the year, that rates will be low fives, and I hope that’s correct.
Q: What causes mortgage rates to increase?
A: It goes back to inflation. Mortgage rates really move with two factors. One is the 10-year treasury bond, which right now sits at about 3.4. As the 10-year treasury moves up and down, historically mortgage rates do as well. As inflation moves up and down, historically mortgage rates always follow that. When inflation increased to about 9%, that’s when you saw rates in November as high as they’ve been in a long time. But now, as inflation is slowly moving in the right direction, you see mortgage rates follow suit.
Q: Will mortgage rates ever return to lower pre-inflation levels?
A: I would say doubtful. You had a large number of homeowners in 2020 and 2021 that either bought or refinanced in the twos and threes. Much of that had to do with COVID. I think getting back somewhere in the fours would be a huge win, but I highly doubt the twos and threes is something that we’ll ever see again.
Q: How can homebuyers and current homeowners find out current mortgage rates?
A: They can call me. I have a large number of people pre-qualified now that I update with the rates almost on a daily basis. If you’re not in my industry and don’t do this every day, you should rely on a professional like myself to tell you what the mortgage rates are doing and what the trend is at any given time. Everyone’s situation is different. Monitoring it yourself can be a mistake because with the rate, much of it is what you pay for it. I can get to a 4% rate today, but it’s going to come with a substantial cost that does not make financial sense. Talking to a mortgage professional versus just looking online is in my opinion highly recommended.
Q: Is there anything that you’d like to add?
A: Mortgage rates are always moving, and they are going to be based off economic factors. Each time the Fed releases their report, each time you have employment numbers, you see not only the stock market respond, but you also see mortgage rates respond to that, either favorably or unfavorably.
Questions for Homebuyers
Q: Should homebuyers wait until mortgage rates drop before trying to purchase and finance a home?
A: The answer is do not wait, and here is why. There is a misconception out there mainly due to the media, that there is going to be a big drop in housing prices, but that’s not going to happen. There’s a ton of demand and very little supply right now. That is the very opposite of 2008. In 2008, there was no demand and a ton of supply, which brought housing prices down. So you’re still going to see housing prices increase slowly as they have historically. If you like the house, it fits your needs, and you can stomach the payment, when rates do come down there is always going to be a refinance opportunity. In 2020 and 2021, I did over 100 refinances. We use the phrase, “Date the rate, marry the house.” The rate likely, especially in this market, is going to be temporary.
Q: How can homebuyers get the best mortgage rate?
A: I would always recommend somebody looking at an option or two, but once again, it’s not just about the rate. I’ve seen it so many times in my career, and I’ve been doing this a long time, where a buyer will say a lender offered me a quarter point less than you. I’ll ask to see the estimate, and I’ll tell the buyer that I will be the first one to tell you if I’m beat and they have a better deal. But many times, they have substantial closing costs associated with that lower rate, which to me many times can be unethical. I’m always very transparent when it comes to cost and when it comes to rate. I tell buyers don’t be blinded by that rate because 99 times out of 100 we are very competitive with the market. Looking at a competitor’s estimate will not only educate them, but also save them money by working with us. I don’t discourage people from getting multiple options, but just be careful not to be consumed by the rate. Every rate has its cost.
Q: Do mortgage rates affect how much a person can afford to pay for a home?
A: Absolutely. Take 2020-2021 versus today, a 2 or 3% rate versus a 5 or 6% rate, it will have a large effect depending on the deal. The rate affects your monthly payment, the monthly payment affects the debt to income ratio, and the debt to income ratio affects how much you can afford.
Q: With higher mortgage rates, are homebuyers now paying much more for a home?
A: The answer is yes. It’s not just mortgage rates, but it’s appreciation of homes over the past two years. In that time period, homes have appreciated 15-25% depending on the area. So not only are first-time homebuyers getting hit with higher rates, they’re getting hit with higher purchase prices. It is a double whammy.
Q: Should homebuyers get preapproved for a home loan?
A: You want to know what you can afford. The realtor wants to know they are not wasting their time. The last thing you want is to go look at a house, it’s $350,000, fall in love with it, and realize that you can’t qualify for it. Before you go look at anything, get prequalified for a mortgage and understand your price point/buying power.
Q: Do you have any additional advice for homebuyers?
A: Don’t sit on the sidelines. Don’t listen to the news media. It seems to be all gloom and doom out there, but buying a home is the biggest driver of wealth in this country, always has been and always will be. We’ve been spoiled by interest rates. The average rate in the last 50 years is 8%. That’s important to know. So getting in that house with the opportunity to build equity, locking a rate below historical average, and having a chance to refinance that rate to an even lower number is much more important and much more valuable financially than paying rent. Rent is 100% interest. That’s what people don’t think about. In a couple of years, houses could be up 10% in price and rates will be down a bit, but that price increase will offset the rate decrease. Don’t sit on the sidelines and think that it is a bad market because that is fiction.
Questions for Homeowners
Q: Is this a good time for homeowners to refinance their home to get a lower mortgage rate or should they wait for a while?
A: I would wait. It depends on the borrower, but I’ve done two refinances in the past year because they had life events. Overall, it is not a robust refinance market.
Q: What are the pros and cons of refinancing your home?
A: The pros are a cheaper rate and a cheaper monthly payment. There is also a product called a cash-out refinance that a borrower can utilize if they need to do a renovation or pay for kids’ college or consolidate debt. Those were very prevalent in 2020-2021. Say you have a balance of $200,000, and the house is worth $500,000. You could pull out $100,000, have a new mortgage payment, and then take care of those things. The cons are there are closing costs associated with the refinance. The good news is that’s rolled into the loan amount, not just out of pocket.
Q: When is refinancing your home worth it? How much should your rate drop?
A: Typically, on a 30-year mortgage, you want to see the rate drop at least 0.75% to 1%. What I also take into account is life events. For instance, how long are you going to be there or are you planning on having children and outgrowing the house. Every situation is unique. If you are going to be there four or five years and the rate drops 0.75% to 1%, that’s when my spider sense goes off that it’s time to refinance. I am proactive in reaching out to my clients to start that process.
Q: Will homeowners owe more if they refinance?
A: There are closing costs associated with it, but once again, I provide them the financial analysis to see if it makes sense. The goal is to have the monthly savings offset the cost in a short period of time.
Q: Do you have any additional advice for current homeowners?
A: Sixty-five percent of current homeowners have a very, very low rate. Much of that has to do with COVID and is causing the low inventory that we have currently. Most current homeowners are in a good position in terms of equity and monthly outlay. It is the first-time homebuyers, seniors that are trying to downsize, or people wanting to upgrade where we have a logjam happening right now. It will sort itself out as inflation continues to decrease over time.