Home Buying

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The Federal Housing Administration (FHA) announced new loan limits for 2024 this week, bumping up the “floor” on FHA loans to $498,257.

This represents a 5.56% increase from the current 2023 FHA loan limit of $472,030, which is based on home price movement over the past year.

There is also a ceiling loan limit for FHA loans for high-cost areas, which was increased to $1,149,825 from $1,089,300.

Together, this should boost access to the FHA’s low-down-payment home loan program at a time when affordability has rarely been worse.

FHA loans comes with various perks, whether it’s a cheaper mortgage rate or a lower minimum required credit score.

2024 FHA Low-Cost Area Floor Loan Limits

One-unit property: $498,257
Two-unit property: $637,950
Three-unit property: $771,125
Four-unit property: $958,350

For 2024, the low-cost area “floor” FHA loan limit will be $498,257 for a one-unit property.

It will rise as high as $958,350 for a four-unit property in these low-cost areas, which includes metros like Chicago, Tampa, and Tucson, Arizona.

The floor is set at 65% of the 2024 conforming loan limit, which also announced an increase to $766,500 this week.

It applies to areas of the country where 115 percent of the median home price is less than the floor limit.

Given the large difference in maximum loan amounts, roughly $250,000, it could sway the decision to choose a conventional loan instead of an FHA loan.

For example, if buying a $525,000 home with 3.5% down, you’d be forced to go with a conventional loan in these low-cost areas.

Or you’d need to come in with a larger down payment to make the numbers work.

You can search the FHA loan limits by state and county here to see where your area stands.

2024 High-Cost Area Ceiling Loan Limits

One-unit property: $1,149,825
Two-unit property: $1,472,250
Three-unit property: $1,779,525
Four-unit property: $2,211,600

Similar to the conforming loan limits for Fannie Mae and Freddie Mac-backed loans, there are high-cost loan limits for FHA loans.

These can vary based on the respective median home price in each area, but will be somewhere above the floor to as high as the ceiling.

Speaking of, that ceiling is a hefty $1,149,825 for a one-unit property, which sounds like quite a lot for an affordable home loan option. But I digress.

Some areas between the floor and ceiling include Atlanta ($649,750), Austin ($571,550), Boston ($862,500), Nashville ($943,000), Philadelphia ($557,750), and Phoenix ($530,150).

As you can see, there is quite a range in maximum loan limits, so those buying a particularly expensive property may not qualify for an FHA loan.

Cities at the ceiling include pricier places like Heber, UT, Jackson, WY, Los Angeles, New York City, San Francisco, and Washington D.C.

The FHA noted that maximum loan limits will increase in 3,138 counties in 2024, with 96 county loan limits remaining unchanged.

These new mortgage loan limits are effective for FHA case numbers assigned on or after January 1, 2024.

Ceiling in Special Designated Areas Even Higher

One-unit property: $1,724,725
Two-unit property: $2,208,375
Three-unit property: $2,669,275
Four-unit property: $3,317,400

Last but not least, the ceiling in specially designated areas including Alaska, Hawaii, Guam, and the U.S. Virgin Islands will be even higher.

And even I say higher, I mean way higher. We’re talking maximum loan amounts ranging from $1.7 million to over $3.3 million.

This is to account for higher construction costs in these regions, those with limits this high, I wonder how many home buyers are actually getting anywhere close.

Again, FHA loans are typically reserved for lower-income buyers, so it’s a bit of a head scratcher.

But this is just how the math formula works, prescribed by the National Housing Act.

Along with this announcement, the HECM (FHA reverse mortgage) maximum claim amount will increase from $1,089,300 in calendar year 2023 to $1,149,825 as of 2024.

Note that if home prices happen to fall in 2024, theses loan limits won’t decrease. They’d merely stay unchanged.

Source: thetruthaboutmortgage.com

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A financial hardship letter explains an unforeseen circumstance that has made you unable to make regular payments on a loan and requests a modification to help you get back on track.

No matter how well you prepare, many Americans will encounter times of financial hardship due to circumstances outside of their control. Events such as company layoffs, natural disasters, and divorce can throw a wrench in our finances, making us unable to pay our financial obligations. 

Instead of falling behind on payments during difficult times, take a proactive approach to your finances. Sending a financial hardship letter to your creditor can help you salvage your credit score while you get back on your feet. 

Read on to discover what these letters are, situations that warrant them, and how to write your own. 

Table of Contents:

What Is a Hardship Letter?

A financial hardship letter is a correspondence you send to a creditor that explains why your current financial situation prevents you from making debt payments. After providing details about your hardship, such as the cause and timeline, request that the creditor provide a mutually beneficial solution. 

Depending on your specific circumstances, you could suggest to your lender that they assist you by: 

  • Suspending your monthly payments for the time being 
  • Decreasing your payment amount
  • Lowering your interest rate 
  • Pardoning overdue payments 
  • Waiving penalties for late payments 
  • Adjusting the terms of your loan 
  • Resolving your debt for an amount less than you owe

For example, if you were recently injured due to an accident, you could ask the creditor to temporarily pause your payments until you recover. 

What Is Considered Financial Hardship?

Since everyone’s situation is different, you may be wondering what qualifies as financial hardship. A financial hardship is any scenario beyond your control that makes you unable to pay for your living expenses. 

Examples of financial hardships include, but are not limited to, the following: 

  • Employment layoff
  • Pay cut
  • Home foreclosure
  • Decreased number of working hours
  • Job relocation 
  • Natural disaster
  • Emergency event
  • Divorce or separation 
  • Military deployment or transfer
  • Death of a spouse or family member
  • Incarceration
  • Serious injury or illness

As you can see, the examples above are out of your control. On the other hand, circumstances that creditors are not likely to deem as a financial hardship include: 

  • Poor money management or overspending 
  • Routine expenses
  • Voluntary employment shift 
  • Purchase of a home
  • Decrease in property value
  • Payment of college tuition
  • Investment losses

How to Write a Hardship Letter

When writing your financial hardship letter, address it to the loss mitigation department of your lender. Include your contact information and loan number so they can identify your account. Write your letter clearly and concisely, following the instructions provided below. 

1. Explain Your Hardship 

Be honest with your creditor about the circumstances surrounding your hardship, but keep your explanation concise. Aim to keep your explanation under one page. 

While you should include relevant details such as what caused the hardship and when it started, don’t include unnecessary information. For example, you might inform the creditor that you’re going through a divorce and the legal fees are causing financial strain, but you don’t need to go into the cause of the divorce. 

Remember to be truthful—don’t exaggerate your circumstances or include inaccurate information. 

2. Provide Documentation to Back Up Your Claim

Provide up-to-date and relevant documentation as evidence for the statements you make in the letter to bolster your claim. Documents the lender may want to review include: 

  • Bank statements 
  • Pay stubs 
  • Tax returns 
  • Medical bills
  • Employee termination letter
  • Divorce certificate
  • Military orders
  • Proof of incarceration 

3. List Steps You’ve Taken to Alleviate Your Financial Burden

Let the creditor know the actions you’ve already taken to help improve your financial situation and pay your debt. Steps you might take include limiting expenses, selling personal items, or working a side gig to make extra income. This provides the lender with additional context and shows that you’re taking personal responsibility for your financial situation.

4. Clearly State Your Request 

The purpose of writing a hardship letter is to request help from the creditor during your difficult time. Make sure to clearly state exactly the action they can take to assist you and how it will help you. Provide your proposed solution or a couple of suggestions the lender might consider. 

5. State Your Commitment to Paying Your Debt

Conclude your letter with a statement expressing to the lender that you’re committed to paying your debt and finding a solution that works for both of you. Sign your name to the end to formally close the letter.

Financial Hardship Letter Template + Sample

Below is a hardship letter sample and template to help you get started. When using the template, make sure to enter your own information where there is bolded text. 

Mary Smith 

101 Cedar Road

Savannah, GA 31302

[email protected]

(912) 333-3333

11/01/2023

Harry Jones, Loss Mitigation Department of Georgia Bank 

444 Peach Lane

Atlanta, GA 30033

Re: Account #10122467894231

Dear Harry Jones:

I am writing this letter to request assistance with my personal loan during a time of financial hardship. 

Approximately two weeks ago, I was let go from my job due to company-wide layoffs. As a result, I have been unable to continue making regular payments on my loan. I have included my termination letter that proves the validity of my hardship. 

While I have taken steps to increase my income during this time, such as babysitting and selling old clothes, I am still not able to make full payments. 

I fully intend to pay off my loan and am requesting your help to get me back on track. I would like to discuss possible solutions such as temporarily pausing payments, lowering my interest rate, or any other option that might be available to me. I expect my hardship to be resolved in approximately three to six months, after which I can resume my regular payments. 

I want to reiterate my intention to fulfill my financial obligation. If you have any questions or would like to discuss a solution, please contact me at (912) 333-3333 or email me at [email protected]. 

Thank you for taking the time to review my request, and I hope we can come to a mutually beneficial agreement. Your support during this time of financial hardship is greatly appreciated. 

Sincerely, 

Mary Smith

How to Get Through Financial Hardship

In addition to writing a hardship letter, here are some other tips to help you get through times difficult times and continue to reach your financial goals: 

  • Create a budget: Use a monthly budget template to write down your monthly income, expenses, and debt to paint a full picture of your current financial situation. 
  • Consider debt consolidation: If you have many different debts, debt consolidation can simplify your finances and help you pay your balance quicker and at a lower interest rate. 
  • Limit unnecessary expenses: During difficult times, it’s important to only spend money on the essentials. Consider canceling subscriptions, reducing electricity use, and eating at home to save money.
  • Start a side hustle: Having multiple income streams can help mitigate financial burdens. Examples of side hustles include pet sitting, driving for a ride-share company, online tutoring, and joining a focus group. 
  • Build an emergency fund: Aim to save three to six months’ worth of expenses as a cushion in case of a personal emergency or unexpected expense. 

Writing a financial hardship letter can help you maintain a good credit score during a crisis. While navigating your situation, it’s important to continue monitoring your credit. To make this easier during times of stress, check your free credit report card to see what’s happening with your credit at a glance. 

Source: credit.com

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A new program called “Lock It, List It” allows real estate agents to secure a mortgage rate for a buyer before the property even hits the market.

Chicago-based Guaranteed Rate launched the product just weeks after mortgage rates surpassed the dire 8% threshold.

This has pushed housing affordability to the brink, while also turning off prospective home buyers and making it harder to sell a home.

A below-market interest rate that is guaranteed could boost demand, and make it easier for a seller to unload their property.

It’d be a win-win for all parties involved, including the buyer, seller, listing agent, and loan officer.

How Lock It, List It Works

As the name suggests, a mortgage rate is locked in before the property is listed on the market.

Known as a mortgage pre-lock in industry jargon, the interest rate is secured before a buyer is found for the property.

This is a rather novel approach, as pre-locks are typically for home buyers who lock in a rate for themselves then search for a property.

In this scenario, the home seller is essentially locking in a rate on the home buyer’s behalf ahead of time.

But it only works if the buyer agrees to use Guaranteed Rate to obtain their mortgage.

Once a buyer makes an offer on the property, they would need to get approved for a mortgage with GR to take advantage of the offer.

The deal would be structured by the listing agent and a Guaranteed Rate loan officer via a fee that pays for the locked-in discounted rate for a buyer.

In other words, the cost might come out of the seller’s proceeds and/or the listing agent’s commission.

It’s unclear how much below market the mortgage rate might be, but if would need to be compelling enough to draw in a buyer (and have them use their preferred lender).

This unique benefit would also allow the listing agent to market this discounted mortgage rate to prospective home buyers in their listing.

Guaranteed Rate believes this could help the home to stand out from the crowd and give it a better likelihood of selling.

It would also allow the real estate agent to virtually guarantee a certain interest rate to a prospective home buyer, which would be helpful if rates continue to rise.

Taking a Page Out of the Home Builder’s Playbook

What Guaranteed Rate is doing with Lock It, List It is what home builders have been doing for a while with their creative financing specials.

Despite mortgage rates more than doubling in the past 18 months, home builders have continued to offer below-market mortgage rates to their customers.

Known as a mortgage buydown, money is paid upfront to lower the interest rate for the life of the loan.

Home builders have been offering both permanent and temporary mortgage rate buydowns to lure in buyers lately. Some have even offered both on the same loan.

For example, one builder offered a temporary down to 2.99% via 3-2-1 buydown. And bought down the rate for years 4-30 to 5.99%.

Deals like these have made captive builder lenders, such as Lennar Mortgage and Inspire Home Loans, essentially impossible to beat.

This program gives existing home sellers a leg up on their builder competition, assuming the discounted rate is low enough.

Is This a Good Deal for Home Buyers?

The program sounds like a good idea on paper, but it’s really dependent on the direction of mortgage rates. And how much the rate is bought down.

This is the same of any pre-lock option. When you lock in a mortgage rate ahead of time, you do so expecting mortgage rates to move higher.

You’re essentially locking in today’s low price because you’re concerned rates could worsen, which would make home buying more expensive.

Or even out of reach depending on how much worse they get between application and closing.

But if rates move lower, it doesn’t provide much if any benefit.

For example, if this program was around in early 2022 when the 30-year fixed was still priced around 3%, it would have been a huge deal.

It could have allowed a home buyer to snag a 3% rate as rates surged to 5% and beyond.

But we may be at a point where mortgage rates have peaked, and could in fact fall from here.

It Depends Where Mortgage Rates Go Next

In just the past couple weeks, mortgage rates surpassed 8% but then fell precipitously to around 7.25%. Those who pay discount points are now seeing rates in the mid-6s again.

If this continues, home buyers may not want to rush into a mortgage rate lock if there’s the expectation things get even better.

Of course, it depends how low the Lock It, List It mortgage rate is. If it’s significantly below market, it could still be a great selling point.

So the success of this program will really depend on where mortgage rates go next.

Note that you must use Guaranteed Rate as your mortgage lender if you wish to take advantage of the offer.

As always, it can pay to shop around with different banks, lenders, mortgage brokers, and so on to see what else is out there.

Even without a special bought-down rate, you might find a better combination of rate and fees from a different company.

Lock It, List It is available on both conforming loans and high balance loans that exceed the baseline conforming loan limit.

Guaranteed Rate was the nation’s 11th largest mortgage lender in 2022, and serves home buyers in all 50 states along with Washington, D.C.

Source: thetruthaboutmortgage.com

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Gone are the days of the zero-down mortgage. At least for the typical home buyer.

Instead, the 2023 Profile of Home Buyers and Sellers from the National Association of Realtors (NAR) revealed that down payments haven’t been higher in decades.

This, despite the widespread availability of low-down and zero-down home loan options.

As for why, it could be because inventory remains low, which has kept competition lively in spite of much higher mortgage rates.

Another reason might be those high interest rates themselves, which make it less attractive to take out a large loan.

Median Down Payments Highest Since 1997 for First-Time Home Buyers

Per the NAR report, the typical down payment for a first-time home buyer was 8%, which might not sound like a lot.

But it is the highest figure since 1997, when it stood at 9%. If you look at the chart above, you’ll notice it dipped pretty close to zero in those bad years back in 2005-2006.

At that time, creative financing and lax underwriting (aka no underwriting at all) allowed home buyers to purchase a property with nothing down.

While that may have been risky on its own, they could also use stated income to qualify for the loan.

And they could choose a super toxic loan type, such as the now forgotten option ARM, or qualify via an interest-only payment.

That may explain why we experienced the worst mortgage crisis in recent history, followed by the nastiest housing market crash in generations.

So certainly some good news there, with down payments on the rise despite unaffordable conditions.

To that end, home buyers could be opting to put more down to get a more favorable mortgage rate, and/or to avoid mortgage insurance (PMI) and unnecessary pricing adjustments.

Back when mortgage rates were hovering around 3%, it made sense to put down as little as possible and enjoy the low fixed-rate financing for the next 30 years. Not so much today.

Another reason home buyers might be putting more money down is due to competition. While the housing market has certainly cooled this year, there is still a dearth of supply.

This means if and when something decent pops up on the market, there may still be multiple bids.

And those who are able to muster a larger down payment will generally be favored by the seller.

The one worrisome thing was how first-time buyers were securing their down payments recently.

They’ve had to increase “reliance on financial assets this year,” including the sale of stocks or bonds (11%), a 401k or pension (9%), an IRA (2%) or the sale of cryptocurrency (2%).

Always a bit questionable if selling retirement assets to purchase a home.

Typical Down Payment for Repeat Home Buyers Up to 19%

Meanwhile, the typical repeat buyer came in with a 19% down payment, which is the highest number since 2005 when it was 21%.

Down payments for repeat buyers also tanked prior to the early 2000s housing crisis because underwriting was so loose at the time.

There was really no reason to come in with a large down payment at the time given the wide availability of flexible loan products, and the notion that home prices would just keep on rising.

This explains why homeowners at the time also favored negative amortization and interest only home loans.

They all assumed (or were told) that the home would simply appreciate 10% in a year or two and they could refinance over and over again to better terms.

Today, it’s more in line with levels prior to that fast and loose era, and appears to be steadily climbing.

This could also have to do with a large number of all-cash home buyers, such as Boomers who are eschewing the 7% mortgage rates on offer.

But it is somewhat interesting that the median number was 19% and not higher.

After all, a 20% down payment on a home comes with the most perks, like lower mortgage rates and no private mortgage insurance requirement. But I digress.

Note that all the figures from the survey only apply to buyers of primary residences, and do not include investment properties or vacation homes.

How Much Do You Need to Put Down on a Home These Days?

As noted, low and no-down mortgages still exist, though they are typically reserved for select applicants, such as VA loans for veterans and USDA loans for rural home buyers.

However, you can still get a 3% down mortgage via Fannie Mae or Freddie Mac, which virtually every lender offers.

There are also FHA loans, which require a slightly higher 3.5% down payment, but lower credit score requirements.

On top of this, there are countless homebuyer assistance programs, including silent second mortgages that can cover the down payment and closing costs.

In other words, there is no shortage of affordable loan options today.

But there is an advantage to putting more down, such as eliminating the need for mortgage insurance and having a smaller outstanding loan balance.

With mortgage rates so high at the moment, the less you finance the better.

This could also make it easier to apply for a rate and term refinance if and when rates do fall, thanks to a lower LTV ratio.

Regardless, it’s good to see down payments rising as home prices become more expensive.

This contrasts the bubble years back in 2004-2006 when homeowners put less and less down as property values increased. It didn’t turn out well.

Source: thetruthaboutmortgage.com

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I’ve already written about it not being the best time to buy a home right now, at least from a pure investment standpoint.

In short, home prices are expensive relative to incomes, mortgage rates have more than doubled, and there’s little quality inventory.

And now we can quantify just how long it takes to break even on a house, per a new analysis from Zillow.

Hint: it’s a long, long time, even if you’re able to muster a big 20% down payment.

So if you’re thinking about buying a home today, prepare to stick around for the long-haul.

How Long to Break Even on a House These Days?

– 3% down payment: 13 years and six months to make a profit.
– 5% down payment: 13 years and three months to make a profit.
– 10% down payment: 12 years and seven months to make a profit.
– 20% down payment: 11 years and three months to make a profit.

A new Zillow analysis tried to determine how long you’d need to own your home before you could sell it for a profit.

This factors in the closing costs associated with the home purchase, the mortgage interest paid, home maintenance costs, and the sales costs once it came time to list the property.

Specifically, they assume 3% closing costs at purchase, 1% home maintenance fees, and 6% in closing costs at the time of sale, along with all that mortgage interest.

In reality, it could be even higher. It’s not unusual for real estate agents to charge 5-6% of the sales price.

So if you’re putting down just 3%, you’re already in the hole, especially once you consider those closing costs as well.

To offset all those expenses, you need to make regular payments to principal each month and hope the property appreciates in value over the years as well.

The rule of thumb says it normally takes about 3-7 years to break even on a home purchase, with perhaps five years the average.

But that number has risen sharply lately thanks to a combination of sky-high asking prices and equally expensive mortgage rates.

How long you ask? Per Zillow, home buyers today can expect to spend approximately 13.5 years in their house before being able to sell at a profit!

In other words, you better really like your house unless you want to sell for a loss, or worse, be forced to do a short sale.

It Takes More Time to Turn a Profit in Affordable Housing Markets

And here’s the irony. It actually takes longer to turn a profit in more affordable housing markets.

Those purchasing a home in places like Cleveland, Baton Rouge, El Paso, Akron, or Indianapolis might need to wait at least 20 years to reach this crucial profit point.

As for why, it’s because of the slower historical growth rate in these more affordable areas.

Without home price appreciation doing most of the heavy lifting, it takes a lot more time to build home equity.

Simply put, principal payments are a lot less impactful than increases in property values, especially on a high-rate mortgage where most of the payment goes toward interest.

It’s the worst in Cleveland, where Zillow says it can take a whopping 22 years and 10 months to turn a profit.

Similar timelines can be seen in the other metros mentioned, meaning it’s not always advisable to buy a home just because it’s cheap.

There’s a Faster Road to Profit in Expensive Housing Markets

Again, while seemingly counterintuitive, it’s actually easier to turn a profit if you buy a home in an expensive metro.

Of course, the barrier to entry will likely be higher, but it’s one of those rich get richer stories.

For example, in notoriously expensive Bay Area metros such as San Jose or San Francisco, California, the break-even timeline to profit is a much shorter 7 to 7.5 years.

This is still a long time historically speaking, but it is considerably less than in those “cheap” housing markets.

Similar short purchase-to-sale profit timelines can be found in San Diego, Los Angeles, and Miami.

As you can see, these are highly-sought after cities where demand always tends to be strong, and supply always low. And because of that, home prices are often rising.

But there’s a big barrier to entry, whether it’s the high asking price or the large down payment required.

Either way, this data tells us it might not be the best time to purchase a home at the moment, even if you can muster a 20% down payment.

It could be advantageous to wait for a better combination of lower asking prices, cheaper mortgage rates, and better inventory.

Of course, there are reasons to buy a home other than for the investment. But you still need to be prepared to stick around for a while.

Read more: Pros and cons of renting vs. buying a home

Source: thetruthaboutmortgage.com

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Thanks to a record number of price cuts and a big improvement in mortgage rates, home buying conditions have improved tremendously.

Taken together, you might be able to snag a lower purchase price and finance the property with a mortgage rate about .50% lower than what was on offer last month.

Does this mean it’s time to rush out to buy a home? Or does it continue to pay to be patient?

Personally, I’m still in the no-rush camp, but if you do see something you love, the price tag could be a little lower.

And there may be less competition as it tends to drop off later in the year as buyers get consumed with other things.

Unseasonal Increase in For-Sale Listings as Asking Prices Drop

Redfin reported this morning that some “glimmers of hope” are emerging for prospective home buyers.

The first one being that new listings increased 1.5% from a year ago during the four weeks ending November 5th.

This was just the second such increase since July 2022, a testament to the continued short supply plaguing the housing market.

They noted that this increase is partly because new listings were falling during this period last year.

At the same time, active listings are at their highest level since the beginning of 2023, and months of supply ticked up 0.2 points to 3.6 months.

Inventory remains constrained nationally, with 4 to 5 months typically signifying healthy supply. But it is rising, which appears to be leading to price reductions.

And the share of listed homes with a price drop increased to 6.8%, a new record high.

However, the median asking price was still 4.9% higher than a year ago at $379,725, the biggest increase in over a year.

This means the median monthly mortgage payment remains near an all-time high of $2,732, assuming a 7.76% 30-year fixed mortgage rate.

The monthly mortgage payment hit an all-time high two weeks ago when it was $8 higher.

Total Housing Payments Are Up Over 10% From a Year Ago

When you factor in the steeper asking prices and the higher mortgage rates, total housing payments are still up 10.6% year-over-year.

So despite increased inventory and rising price cuts, it’s not as if discounts are rolling in.

The only real improvement has been a pullback in rates, providing a boost to affordability in an otherwise bleak environment.

If you zoom out and look at all of 2023, and ignore the month of October, mortgage rates remain close to their highs for the year.

In other words, while affordability improved relative to a month ago, it remains at/near its worst levels of the year.

As such, it might benefit buyers to continue to wait for prices/rates to come down further.

This counters advice from Redfin economists, who “recommend that serious homebuyers consider locking in a mortgage now.”

The economists, like many others, are cautious with regard to mortgage rates and concerned they could easily reverse course.

They cite the upcoming CPI report, which will be released on November 14th. If you reveals that inflation ticked up again, mortgage rates could resume their climb.

And they’re not wrong that it’s much easier for mortgage rates to go up than come down.

Mortgage lenders are generally defensive in their pricing. They’re happy to raise rates at the drop of a hat, but reluctant to lower them, even if the data supports it.

So if you are far along in the home buying process, it could make sense to lock in a mortgage rate and avoid taking chances.

Prices and Rates Could Continue to Fall into December

It could make sense to continue to wait to buy a home, as pressure has finally seemed to ease on mortgage rates.

At the same time, housing inventory is climbing at a time of year when it typically doesn’t, indicating possible incoming weakness on pricing.

This means it could be beneficial to bide your time on a home purchase, instead of rushing in to nab what could in hindsight be a small discount relative to recent levels.

A while back, I dug through Freddie Mac data and found that mortgage rates tend to be lowest in December.

The 30-year fixed has averaged 5.97% in the month of December, nearly 0.25% lower than the 6.18% rate typically seen in the months of April and May.

Those months also tend to be when homes sell for the most money as it’s the traditional spring home buying season.

There are more buyers out, more demand, increased bidding wars and competition, and higher rates.

So there’s certainly an argument to be made about buying a home in the latter months of 2023, at least relative to other months recently.

But overall, it still feels like it’s not a good time to buy a home, at least from an investment standpoint, in most areas of the country.

Until asking prices and mortgage rates come down, it could pay to continue waiting for better.

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

Lately, mortgage rate buydowns have been all the rage as a means to reduce home buying costs.

This could come in the form a temporary or permanent rate buydown.

These reduce the mortgage rate for the first couple years or for the entire loan term, respectively.

And in doing so, make a home purchase a bit more palatable at today’s still-high asking prices.

But is the market about to shift to adjustable-rate mortgages instead?

Home Builders Have Been Selling Homes with Big Rate Buydowns to Make the Math Work

As mentioned, mortgage rate buydowns have been quite popular over the last couple years.

Prior to early 2022, they were absolutely nonexistent because there wasn’t a need. After all, the 30-year fixed averaged about 3% in January 2022.

But things changed in a hurry when the Fed halted QE, started QT, and began raising the fed funds rate feverishly.

Nearly two years later, we’ve got a 30-year fixed mortgage rate close to 8%, or even above that level depending on individual loan attributes.

As rates have skyrocketed, so too has the prevalence of rate buydowns, whether permanent or temporary.

The most common temporary buydown is the 2-1 buydown, which features an interest rate 2% below the note rate in year one and 1% below the note in year two.

Then it reverts to the full note rate. For example, you could receive a temporary buydown of 6% in year one, 7% in year two, then be stuck with a rate of 8% for years 3-30.

Not great unless mortgage rates get way better in a hurry.

But the home builders have been more aggressive, offering permanent mortgage rate buydowns that last the entire loan term, often 30 years.

So instead of a mortgage rate of 7.75%, they might offer a special buydown of 5.99% for the life of the loan. Not too shabby!

Here’s the problem though – as mortgage rates continue to rise higher, the costs of those buydowns increases.

It’s getting to the point where it costs tens of thousands of dollars to offer such markdowns.

I Stumbled Upon a Home Builder Pitching an ARM Instead of a Rate Buydown

$500k Loan Amount 7/6 ARM
 30-Year Fixed
Interest Rate 5.875% 7.625%
Monthly Payment $2,957.69 $3,538.97
Monthly Savings $581.28 n/a
Savings @84 months $48,827.52 n/a
Balance @84 months $447,189.47 $459,994.32

Today, while doing my typical mortgage and real estate research that I do, I came across a home builder, KB Home, offering an adjustable-rate mortgage instead of a buydown.

This was surprising, given the recent trend, though historically speaking pretty darn normal.

Why wouldn’t they offer an ARM, which is going to be the much cheaper option for the builder versus a buydown?

Especially if it accomplishes the same objective, lowering the home buyer’s monthly payment.

The reason these haven’t been a thing lately is because ARMs fell out of style and no one was offering them. There may not have been investors for them either.

But with interest rates so much higher now, you’re starting to see more and more ARM stuff pop up.

And this could actually be a much better deal for the home builders. The offer I saw was a 7/6 ARM priced at 5.875%.

Seeing that the going rate for a 30-year fixed is 7.63% right now, per Freddie Mac, it’s nearly a 2% discount in rate.

That should be plenty to get a prospective home buyer off the fence, even if it’s only good for the first 84 months.

To sweeten the deal, for all involved, you can also generally qualify the borrower at the note rate on a hybrid ARM with an initial fixed-rate period of more than five years.

So if there are any debt-to-income ratio (DTI) constraints, those too might be resolved in the process.

In the end, the builder saves money, the borrower qualifies more easily and gets a lower payment, and a home gets sold.

The Borrower Just Has to Keep an Eye on Rates and Stay Refinance-Eligible

The only difference between a permanent buydown and an ARM is the homeowner now has to keep an eye on mortgage rates if they don’t sell by month 84.

At that point, they’d need to look into a rate and term refinance, assuming interest rates were adequately lower.

It’s not always a slam dunk to refi, either because rates didn’t come down or the borrower no longer qualifies for a mortgage.

Perhaps they lost their job or had unsteady income, or their home dropped in value.

These things can happen, jeopardizing a refinance application and turning an ARM on its head.

But between then and now, each payment whittles down their outstanding balance a little bit faster due to the lower interest rate

And they’ve still got a pretty long time to sit on that ~2% lower mortgage rate before a decision needs to be made…

The big question is will mortgage lenders (and borrowers) embrace ARMs again? If so, they’ll return with a force.

(photo: Elvert Barnes)

Source: thetruthaboutmortgage.com

Apache is functioning normally

For those of you still wondering why home prices haven’t plummeted, despite significantly higher mortgage rates, it’s because there isn’t a negative correlation.

A lot of people seem to think that home prices and mortgage rates have an inverse relationship, but it simply isn’t true.

Just look at history and you’ll see that it’s perfectly normal for home prices and interest rates to rise.

Or for both rates and prices to fall in tandem. Ultimately, there isn’t a strong correlation either way.

However, home sales certainly slow down when the cost of financing rises, as we’ve seen this year.

Why Home Prices Go Up In Spite of Higher Mortgage Rates

First off, let’s look at the current dynamic in the housing market. Both mortgage rates and home prices have risen considerably over the past year and change.

The 30-year fixed has climbed from around 3% to start 2022 to 7.63% today, per Freddie Mac weekly survey data.

Despite this more than doubling in interest rates, home prices increased 4.6% from July 2022 to July 2023, per the FHFA’s latest seasonally adjusted monthly House Price Index (HPI).

This is higher than the annual growth rate since 1991, which seems like a head-scratcher. How could home prices outperform with mortgage rates surging?

Well, higher mortgage rates generally indicate that the economy is hot, which it most certainly has been over the past year and change.

More jobs and increased wages, coupled with a low interest rate environment, increased the money supply and led to a lot more consumer spending and an increase in prices, home prices included.

Unfortunately, this also resulted in high inflation, which is why the Fed has raised its own policy rate 11 times since early last year.

But this economic strength is what continues to propel home prices higher, coupled with a severe lack of for-sale inventory.

So if you’re wondering why 8% mortgage rates haven’t sunk the home prices, now you know.

Sales Volume Gets Crushed When Mortgage Rates Rise

On the other hand, when mortgage rates increase significantly, home sales tend to take a big hit.

This happens for obvious reasons, the main one being a lack of affordability. Fewer home buyers can qualify when financing costs are prohibitively high.

Sure, folks have seen their wages increase and they might have a good job, but their DTI ratios aren’t what they used to be.

Per NAR, total existing-home sales fell 2.0% in September from August to a seasonally adjusted annual rate of 3.96 million.

Sales were down 15.4% year-over-year from 4.68 million in September 2022, and are now at their lowest sales pace since October 2010.

For reference, existing home sales exceeded the six million mark back in 2021, the highest level since 2006.

Meanwhile, the inventory of unsold listings was up 2.7% in September from a month earlier, totaling 1,130,000 homes for sale.

But supply was off 8.1% compared with September of 2022, representing just 3.4 months at the current sales pace. That’s well below NAR’s desired 6-month supply.

However, despite less demand and fewer buyers, the lower number of sales isn’t resulting in lower prices.

Instead, we simply have a housing market with low demand and low supply, and not a lot of budging from sellers on price.

That could change as time goes on, but even with mortgage rates around 8% we’ve yet to see big price declines. And we might not.

When Mortgage Rates Surge Higher, Home Prices Seem to Increase Even More

What’s perhaps even stranger to the untrained eye is that when mortgage rates swing higher, home prices seem to outperform.

That brings me to an interesting piece written by Jonathan Lansner, who looked at home prices and sales volume in Southern California, and the impact of higher/lower mortgage rates.

He found that median prices have appreciated 4.7% since 1988, but this annual gain in Los Angeles averaged 7.6% when mortgages “were in their steepest jumps.”

Meanwhile, when mortgage rates “were in their steepest drops,” LA median home prices only experienced 1.6% gains.

So you’re telling me high mortgage rates fueled even higher home prices. And declining mortgage rate resulted in falling home prices?

Apparently, yes. As for why, it’s the economy! Remember, mortgage rates tend to rise when the economy is doing well.

And they often decline when the economy goes downhill, or falls into a recession, which some believe is overdue at this point.

I wrote a piece a while back regarding this very topic and found that mortgage rates went down during every recession since 1980.

The one exception was the 1973-1975 recession, when 30-year fixed mortgage rates increased slightly from 8.58% to 8.89%.

With regard to jobs, Lansner noted that over the past 35 years, employment grew 2.7% annually in California when mortgage rates “surged,” but shrank at a 0.7% annual pace when rates “tumbled.”

So maybe just maybe, prospective home buyers will discover that lower mortgage rates are accompanied by lower asking prices, possibly in 2024.

Read more: Mortgage rates and home prices can fall together.

Source: thetruthaboutmortgage.com