Interest rates on 30-year conforming mortgages have moved up by more than 50 basis points since the election on Nov. 8. (A single basis point is 0.01%.) That means that within just a few weeks, mortgage rates have moved to levels we haven’t seen in more than two years.
So what does that rate shift mean? Well, it indicates an economy with very low inflation moving to one with more significant inflationary pressures.
Long-term bonds and mortgages are less attractive to investors when inflation is higher, leading to lower prices for bonds and therefore higher interest rates.
In real terms, the movement in rates so far has increased mortgage payments by 7%. On a median-price home, that shift amounts to more than $750 in additional interest per year. Make no mistake: That is bad news for future buyers.
This week, the average 30-year mortgage had a rate of 4.27%. Over the past five years of the housing recovery, rates have failed to stay above 4%. But things look different this time around. Rates are more likely to go up from here rather than down. And that means that now more than ever, potential buyers need to be working hard to secure the best rate possible on their own mortgage.
We are already seeing evidence that consumers have been able to mitigate some of the increase in lenders’ advertised rates. Looking at a large sample of 30-year confirming mortgages locked on the Optimal Blue lending platform from Nov. 9 through Dec. 2, the average change on actual 30-year mortgages was 43 basis points.
How to get the best mortgage rate?
Here are some ways that you can improve the rate you are quoted:
Shop around. Mortgage rates often vary from lender to lender, just like gas prices vary from station to station. Borrowers should put as much effort into finding the best mortgage for themselves as they do finding the best home. Compare rates, points, and fees.
Ask for discounts. Leverage potential rate discounts from financial companies that already provide you services. Your loyalty could be worth a better rate. You’ll never know until you ask. So ask.
Improve your credit score. If your credit is less than excellent, increasing your score by 25 basis points could result in a rate that’s lower by 10 basis points. Higher credit scores mean lower risk to lenders, and lower risk translates into lower rates.
Pay for a discounted rate. Lenders will often offer a lower rate for a fixed fee paid upfront called a discount point. You can do the math to see if the cost of the discount is worth the lower payment you would receive as a result.
Put more money down. The payment is a function of the loan amount, which is what is left over when you subtract the down payment from the purchase price. The more you put down, the less you’ll pay going forward.
Consider a different loan product that has a shorter duration for the fixed rate. These “hybrid loans” combine features of a fixed-rate loan with those of an adjustable-rate loan. A 5/1 hybrid will offer a fixed rate for the first five years of the loan but will then move to align with market rates each year after the loan’s fifth anniversary. The average 5/1 conforming loan rate today is over 110 basis points lower than the average 30-year conforming rate.
The reason the rate is so much lower is the borrower is taking on the longer-term rate risk. So there needs to be a trade-off. Is the future rate risk worth the lower upfront rate? A 10/1 hybrid would maintain a fixed rate for 10 years, the normal tenure that many people live in their homes these days. In other words, for many borrowers, the 10/1 could result in the best deal in terms of interest.
Pay less. Let’s get real. Sellers are not going to be very receptive to taking a lower price just because your financing costs increased. But they might be more open to providing some funds for closing costs, maybe a discount point worth. To a buyer, $1,000 more on the price paid over a 30-year mortgage is worth a lot less than the same $1,000 provided at closing by the seller.
Yet to the seller, they net the same. Just be careful that the appraised value will support the higher price.
The other way to pay less, of course, is to simply find a lower-priced home. But you knew that already, right?
And here’s the good news
While all this might sound quite bleak, there is an upside to future borrowers as a result of higher rates: It’s getting easier to get a mortgage.
The Credit Availability Index reported monthly by the Mortgage Bankers Association is at its highest level since 2007, when 30-year mortgage rates were above 6%.
With higher rates, lenders are encouraged to take on more risk as they can make more money. Likewise, if they want to maintain their mortgage business, they have to more aggressively court the purchase market in order to replace the volumes they have been doing in the refinance market.
That means potential borrowers should be seeing more love from lenders even with low down payments, lower credit scores, and higher debt-to-income ratios.
However, rates will likely be volatile day to day until we see more certainty about future fiscal and monetary policy in the U.S. If you are planning to buy, monitor rates specific to your area daily.
Just keep this in mind: The long-term direction of rates is now decidedly higher, so you’ll want to act sooner rather than later to lock in a mortgage rate that will enable you to buy the home of your dreams.