Mortgage Tips

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If you’re thinking about purchasing a property, you’ve likely sifted through available home loan options to determine what’s best.

There are lots of loan types of choose from, including conventional loans (those not backed by the government) and government-backed loans, such as FHA, USDA, and VA loans.

While each have their pros and cons, there is one hidden danger to taking out an FHA loan, especially if you’re buying a home as opposed to refinancing an existing loan.

In competitive markets where there are multiple bidders vying for the same property, the financing you choose matters.

Sellers want assurances that you can actually close your loan, and that could make or break your offer.

Home Sellers Care What Type of Mortgage You Use

Over the past decade, home buying has been very competitive. It’s been a seller’s market for as long as I can remember.

In fact, even when the housing market bottomed in 2012-2013, it was still difficult to find a property.

While short sales and foreclosures were prevalent then, inventory was still relatively scarce and many savvy buyers entered the fray quickly to scoop up bargains.

Over the years, it has only gotten worse, thanks in part to underbuilding since the mortgage crisis, and also due to record low mortgage rates.

That combination of limited inventory and low mortgage rates propelled home buyer demand to new heights.

And the fact that millions were entering the prime home buying age (of 34 years old) didn’t help either.

Long story short, you’ll often face other bidders when making an offer on a home. And one of the things sellers look at when evaluating offers is financing.

How will you be able to afford the property. Will you pay with cash? Probably not, but know that cash is king and will make your offer stand out above the rest.

A close second might be putting 20% down on the home purchase because it shows you’ve got a lot of skin in the game and assets in the bank.

It also provides wiggle-room should the appraisal come in low, allowing you to retool the loan amount as necessary.

Further down the pecking order are FHA loans, which allow borrowers to come in with just a 3.5% down payment and FICO score as low as 580.

While that’s great for borrowers in need of flexible underwriting guidelines, sellers might not be as keen. After all, they need the loan to fund to sell the property!

FHA Loans Have a Negative Stigma

That brings me to a new report from the Consumer Federation of America (CFA), which “highlights the stigmatization of FHA loans,” especially in competitive housing markets.

The graph above shows how FHA lending was popular when banks were risk-averse post-crisis, but fell off once conditions improved, possibly because such buyers were outbid by those using conventional financing.

In addition, they found that FHA lending is less common in more affluent communities or those that are predominantly white.

This means minority individuals may be relegated to less desirable neighborhoods, where seller’s agents are more familiar and willing to work with borrowers who need FHA loans to qualify.

The result is the unintended effect of “perpetuating socio-economic and racial segregation” in the housing market.

There are a couple main issues that drive this negative perception of FHA loans, per the CFA.

One is that the FHA includes a mandatory inspection as part of the appraisal process to establish minimum property requirements.

While it’s not necessarily an intensive inspection, it does require the property being financed by an FHA loan be “safe, sound, and secure.”

So things like access to clean drinking water and working appliances, and no hazards like lead-based paint or overhead power lines.

Some of these items might wind up being a nuisance for the seller, who must now either repair/resolve the issue or work out an arrangement with the buyer. The CFA notes that sellers aren’t “financially liable to make all repairs.”

But nonetheless, it can present an unnecessary roadblock and put a deal in jeopardy, especially if the buyer is already lacking funds.

That brings us to the second issue, which is that real estate agents have a “perceived stigma about FHA mortgages and their buyers.”

Some look at it like a loan program for less qualified applicants, or a government program (which it is) riddled with bureaucracy or inefficiencies.

In turn, it becomes a sort of self-fulfilling prophecy where such applicants might be avoided and then only bid on homes in less desirable areas.

These areas then see a high concentration of FHA loans as a result, and such loans become further stigmatized because agents in the “good areas” don’t deal with them.

If they are to make their way into a desirable neighborhood and/or home, they might find that they need to “overbid” to get their offer accepted.

What’s the Solution to Make FHA Loans Less Discriminatory?

The CFA came up with four policy recommendations to level the playing field for FHA loans, which they argue have helped millions purchase a home.

They believe more states and cities should pass “source of income” or “source of financing” anti-
discrimination statutes, which make it illegal to refuse to rent/sell/lease based on income used.

Originally intended to protect renters using things like subsidized Section 8 vouchers, it could apply to home buyers using government-insured mortgages.

For example, preventing anti-FHA language in an MLS listing or real estate advertisement.

The next step is to “simplify FHA inspection criteria” to reduce potential hurdles for home buyers.

Another measure would be for real estate agent trade groups to dispel myths related to FHA loans and educate them on how to better work with FHA buyers.

Lastly, they argue that Congress/HUD should increase funding for Fair Housing Centers to investigate FHA home buying trends.

And if necessary, bring cases against offending real estate agents, lenders, brokers, etc. that perpetuate “financing discrimination.”

While I’m not opposed to their findings or their solutions, the bottom line is sellers will still gravitate towards the most creditworthy buyers.

Their agents will likely reinforce this as well when looking at multiple offers. As noted, the cash buyer will always be king. Then the 20% down buyer, assuming they have at least decent credit.

Unfortunately, the lowest rung tends to be the FHA buyer, who can get approved with a 580 FICO score and 3.5% down.

Conversely, a conventional loan buyer using a loan backed by Fannie Mae or Freddie Mac needs a 620 FICO score. And there are fewer hoops to jump through in terms of a mandatory inspection being part of the appraisal.

So in practice, while FHA buyers shouldn’t be discriminated against, they will still be lowest in the pecking order when a seller evaluates offers, all else equal.

Perhaps some of the proposed solutions will help, but if sellers and their agents look at the loan like an underwriter would, and see a lower credit score combined with little money down, they might be less inclined to accept the offer.

And that’s not necessarily a bad approach or discriminatory. It’s weighing the options and determining which buyer has the best approval odds, which gets the home sold.

Make Yourself a Better Borrower Before You Apply for a Mortgage

While there are no doubt issues that need to be addressed and resolved in the lending space, there are some actionable things you can do on your own.

Often, FHA loans are used because the borrower doesn’t qualify for conventional financing.

And sometimes this is due to a low credit score, as the chart above shows even high-income earners often wind up with FHA loans.

So something prospective home buyers can do is work on their credit before they apply for a home loan to ensure their three scores are all 620+.

At the same time, they can better educate themselves on their options so they’ll know if they’re eligible for a conforming loan before speaking to a lender.

Or they can outright ask the loan officer or mortgage broker if they qualify for a loan backed by Fannie Mae or Freddie Mac. And if not, why not?

If you get your ducks in a row early on, you’ll have more lending options at your disposal and be less impacted by any stigma attached to a given financing type.

You may even score a lower mortgage rate and get your offer accepted by the home seller in the process!

Read on: Conventional vs. FHA Pros and Cons

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

A new paper from Yale professor Kelly Shue argues that consumers mistakenly wait to take out mortgages and other long-term loans when the Fed is expected to cut rates.

Their confusion seems to be related to conflating short-term and long-term rates, which don’t necessarily move in tandem.

In fact, short-term rate moves are typically already baked in to long-term rates, meaning there’s no need to wait until the cut is official for an even lower interest rate.

The savings of short-term rate cuts should already be reflected in the interest rate of a long-term loan such as a 30-year fixed mortgage.

Despite this, home buyers and even professional forecasters tend to get this wrong according to the research.

Short-Term Rates vs. Long-Term Rates

Consumers have long misunderstood the relationship between the Fed and mortgage rates.

Many incorrectly believe that the Fed directly controls mortgage rates. So when the Fed announces a rate cut, prospective home buyers expect mortgage rates to come down as well.

For example, the Fed is widely expected to lower its fed funds rate by 25 (or maybe 50 basis points) at its September 18th meeting.

When this takes place, there will be a slew of articles written about how “mortgage rates fall” and the like.

Some may even assume that the 30-year fixed fell by the same amount, whether it’s 0.25% or .50%.

So if the 30-year fixed was 6.50% the day before the meeting, a hypothetical home buyer might think the going rate is 6.25% or even 6% the next day.

In all likelihood, they’ll probably be disappointed if and when they speak to their loan officer or mortgage broker.

Chances are mortgage rates won’t budge much at all. And perhaps worse, they could actually rise after the Fed announces a rate cut!

This all has to do with short-term and long-term rates, with the fed funds rate a short-term rate and the 30-year fixed a long-term rate.

While they can impact one another, there isn’t a direct correlation. This is why you don’t hear mortgage rate experts telling you to use the fed funds rate to track mortgage rates.

Instead, the 10-year bond yield is a good way to track mortgage rates, since historically they have a very strong correlation.

Simply put, they are both long-term rates and function fairly similarly because many home loans are paid off in a decade or so despite being offered a full 30 years .

Should You Wait for the Fed to Cut Rates Before Refinancing (or Buying a Home)?

That brings us to consumer behavior surrounding rate cuts and hikes. Before we talk about rate cuts, which are finally on the table, let’s talk about rate hikes.

When the Fed is expected to hike rates, people tend to rush out and lock their loan before rates go up even more.

The researchers, which include Professor Shue, Richard Townsend, and Chen Wang, argue that this too is “a mistake.”

They note that knowing “that the Fed plans to gradually increase short rates does not mean that long rates will gradually increase in tandem.”

Conversely, they say “the long rate jumps immediately in response to such an announcement,” meaning there isn’t a rush to lock your rate before the Fed acts.

Now when we flip the script and consider a rate cut, the same logic applies. If you’re waiting to buy a home or refinance your mortgage due to an impending rate cut, it might be a mistake.

The Fed rate cuts are mostly telegraphed in advance and known to market participants. So there won’t be a big surprise on the day of the announcement that leads to a significant improvement.

At least not with regard to the rate cut announcement itself. This is why mortgage rates often defy logic on the day Fed announcements take place.

Sometimes the Fed raises its rate and mortgage rates fall. And sometimes the opposite happens.

And again, this is due to the disparity between short-term and long-term rates.

What About Long-Term Monetary Policy?

While I agree with the researchers on the point of short-term rate cuts already being baked in to longer-term rates like 30-year mortgages, there’s one other thing to consider.

The expected long-term monetary policy of the Fed. If they are just beginning to cut short-term rates, there is a chance long-term rates continue to improve over time.

I know, the researchers already debunked this with their talk about gradually increasing rates, saying people “fail to recognize that the current long rate already reflects future expected changes in short rates.”

And at the moment, the consensus is for the Fed to cut rates 200 basis points or more over the next year, per CME.

By the September 17th, 2025 meeting, the fed funds rate could be in a range of 3% to 3.25%, down from 5.25% to 5.50% currently.

Sure, you could argue that this too is somewhat baked in to long-term rates at the moment, but there’s still a degree of uncertainty.

If and when the Fed does actually begin cutting rates, instead of merely hinting at it, we could see longer-term rates trickle down further.

Of course, that will depend on economic data and things like inflation and unemployment, which will only reveal themselves over time.

But if you look at the rate tightening cycle, which involved 11 Fed rate hikes between early 2022 and mid-2023, you’d see that mortgage rates kept getting worse and worse.

Granted that too was driven by the underlying economic data, namely out-of-control inflation.

Still, the 30-year fixed surged from roughly 3% in early 2022 to around 8% during that span of time. So those who did go out and lock their rate ASAP were rewarded.

Even someone who chose to take out a 30-year fixed in March 2022 was able to snag a ~3% rate versus a rate of nearly 6% by as early as June of that same year.

In other words, what the Fed has already indicated might be baked in to rates today, but what we’ve yet to find out could push rates even lower as time goes on.

There’s no guarantee mortgage rates will continue to decrease from here, but it’s decently likely if economic data continues to come in cold.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

You’ve probably heard about the big NAR settlement that could completely change how real estate works going forward.

But if you haven’t, or are unsure of what’s changing, there are two new rules set to go into effect August 17th, 2024.

The first is that offers of compensation will be prohibited on Multiple Listing Services (MLSs).

In other words, listing agents won’t be able to say they’re offering 2% or 3% to the buyer’s agent on the MLS.

The logic is that this type of co-op commission leaves the buyer out of the conversation, which isn’t fair if the buyer ultimately pays for it.

While they may not pay it directly, a pre-determined commission might result in a higher sales price.

In addition, there’s also not much transparency about the fee, nor do consumers know such fees are negotiable.

Simply put, this move is intended to boost transparency and ideally lower fees for consumers by letting buyers negotiate with their agents separately.

But there might be some unintended consequences as a result, which I’ll get to in a moment.

The other major change is that buyers must sign a written agreement before they can tour a property. At that time, compensation will also be discussed.

Real Estate Agent Fees May Drop, However…

Now about those unintended consequences I alluded to. While the standard commission might go down thanks to these new rules, from say 2.5% to 1.5% or even 1% on the buy-side, there’s still the question of who pays it.

As noted, the seller can continue to offer buyer agent compensation, it just can’t be included on the MLS.

So hypothetically this could be conveyed in other ways, such as on their own brokerage website listing, via phone call, text, etc. At least that is what some think for now.

That too could change if this evolves into a situation where co-op commission is completely banned and decoupled.

But as of now, many real estate agents assume they can still make offers of compensation via channels other than the MLS.

In theory, this means nothing might change in some transactions. For example, a seller could tell their listing agent to offer 2.5% to a buyer’s agent. And a buyer’s agent may ask for 2.5% from their buyer.

The logic here is that they want to move the property quickly, and being stingy could backfire.

If they only offer 1%, or offer nothing at all, a buyer’s agent may need to make up the shortfall with the home buyer.

At that point, the buyer may balk or simply be unable to come up with the out-of-pocket funds to pay it.

When all is said and done, the seller might lose a buyer and kick themselves for not just offering compensation and getting a decent sales price.

On the other side of the coin, a buyer might be OK with getting nothing from the seller and paying their agent themselves to sweeten their offer (assuming multiple bidders).

So there are a lot of scenarios here and still a lot of uncertainty about how this could evolve.

But some things I’ve seen thus far are a real estate sign that makes clear the seller will offer buyer agent compensation, buyers forgoing an agent and contacting the listing agent directly, and some even signing a form that says they won’t tour homes that don’t offer compensation to the buyer’s agent.

It’s going to be very interesting. And like I said, it’s still very fluid and there’s a lot we still don’t know.

How Will Home Buyers Pay for Buyer Agent Compensation?

Beginning August 17th, 2024, home buyers will have a few options to pay the buyer agent compensation.

They can maintain the status quo and hope the seller offers it, with the buyer’s agent fee coming out of the sales proceeds.

They can go direct to the listing agent and request a dual agency, where the listing agent represents both buyer and seller.

They can hire a real estate lawyer and have them guide them through the process for a flat fee, assuming such a setup is permitted.

Or they can foot the bill themselves by simply paying it out of pocket.

Some folks seem to think buyers are going to increasingly pay the buyer’s agent commission themselves.

While I don’t fully agree, given the fact that most Americans can barely scrape together their down payment and closing costs funds, it’ll likely happen more frequently.

And if and when it does, it could burden some home buyers, especially the aforementioned who don’t have deep pockets.

That brings us to the original question in this post. If they’re unable to pay cash, can real estate commissions be financed instead?

Real Estate Commissions Can’t Be Financed

At the moment, real estate commissions can’t be rolled into the loan amount, aka financed.

This goes for all major loan types, including conforming loans backed by Fannie Mae and Freddie Mac, along with FHA loans and VA loans.

The same is true of USDA loans for that matter as well, as seen in the screenshot above.

However, it’s important to note that real estate commissions aren’t considered in the maximum interested party contribution (IPC) calculations.

So you can get the seller to pay your buyer’s agent and still get the full amount of seller concessions for other stuff like lender fees and third-party costs, including title insurance and home appraisal.

Both Fannie Mae and Freddie Mac issued letters to confirm that real estate agent commissions won’t count towards the IPC limits if they continue to be customarily paid by sellers.

And the VA released a circular because their regulations specify that a veteran cannot pay for real estate brokerage charges.

In light of the settlement, veterans will be permitted to pay it, assuming buyer-broker charges are not included in the loan amount. In addition, it won’t be considered a concession.

As for why real estate agent commissions can’t be financed, for one it never really came up since the seller would typically pay the buyer’s agent via sales proceeds.

This was essentially a non-issue prior to the landmark NAR settlement.

The other wrinkle is loan-to-value ratio (LTV) restrictions. If the borrower had to add an additional 2-3% of the purchase price in real estate agent commissions to their loan amount, they might no longer qualify.

This is especially true when putting down 0% to 3.5%, which is quite common these days. The homes simply won’t appraise and the max LTVs will be exceeded.

Could this change in the future? It’s possible but not necessarily probable for the issues mentioned above.

What About Using a Lender Credit to Pay Real Estate Commission?

Now let’s talk about a potential solution if the seller won’t offer buyer agent compensation and you don’t have cash to pay it out of pocket.

One viable option could be the use of a lender credit, which technically can’t be used for real estate agent commissions.

However, if the lender credit were used for other costs, such as lender fees and third-party fees, it would free up cash to be used elsewhere.

For example, say you’ve got a $500,000 loan amount and the buyer’s agent wants you to pay them 1%.

A 1% lender credit frees up $5,000 in cash to pay those other costs, allowing a buyer to compensate their agent with the freed up cash.

It’s still very early goings and unclear if such an arrangement will be permitted. After all, co-op commission might be on the chopping block next. But it’s something to consider.

Ultimately, it will likely be best for most home sellers to continue to pay the buyer’s agent via the sales proceeds.

This should maximize the number of eligible buyers/bidders and not shut out first-time home buyers, who are most at risk due to limited funds.

The good news is these real estate agent fees could come down as a result, saving both buyers and sellers some money along the way.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Over the years, there’s been a popular argument that it’s better to buy a home when mortgage rates are high.

The logic is that home prices should be lower if rates are high, and thus you get a property for less.

And the cherry on top is that if/when mortgage rates fall, you can get a lower interest rate too!

When all is said and done, you basically get the best of both worlds. A lower purchase price and low mortgage rate.

But is this scenario actually reality? And do home prices and mortgage rates even have such a relationship?

Buying a Home When Interest Rates Are High

On the surface, buying a home when interest rates are high seems like a pretty bad deal.

After all, your monthly mortgage payment is going to be more expensive if the interest rate is higher.

For example, imagine a $500,000 home purchase with 20% down. That’s a $400,000 loan amount.

  • 7% mortgage rate: $2,661.21
  • 4% mortgage rate: $1,909.66

The difference in PITI payment each month is a whopping $750! That’s not a small amount by any measure.

*You can quickly compare other monthly payments on my mortgage rate charts page.

Anyway, this large difference in payment could make many would-be home buyers ineligible for a mortgage.

Remember, you have to qualify for a home loan, so if your income doesn’t cover that big jump in payment, you could be shut out completely.

For some, the argument to buy when rates are high stops right here. But shouldn’t home prices be cheaper if mortgage rates are higher?

Again, you would think so since expensive items might reduce demand and lead to increased supply.

But if you look at history, there isn’t a strong correlation between home prices and mortgage rates.

In other words, when one rises, the other doesn’t necessarily fall. Or vice versa. So if you’re looking for a bargain, don’t expect one simply because mortgage rates are “high.”

You’ll Get More Payment Relief with a Lower Mortgage Rate

Another issue is that a reduced purchase price doesn’t translate to much of a lower payment.

For example, let’s compare a $500,000 home purchase and $450,000 home purchase at 6% mortgage rates with 20% down.

  • $400,000 @6%: $2,398.20
  • $360,000 @6%: $2,158.38

In this scenario, the monthly payment is just $240 less per month. And that assumes you can get a home for 10% off.

Remember, there’s no inverse relationship historically between mortgage rates and home prices.

So you might not even see such a discount just because mortgage rates are high.

Instead, you could face both a higher mortgage rate and higher home price, as we’ve seen over the past few years.

This also debunks the idea that home prices will go up when interest rates fall. Again, no clear relationship on that front.

They could fall together if the economy tanks and lower rates become less helpful to prospective buyers now facing bigger issues, like unemployment or reduced wages.

Your Home Buying Decision Shouldn’t Be Dictated by Mortgage Rates

Simply put, a home buying decision goes well beyond available mortgage rates.

It doesn’t matter if the 30-year fixed is 3% or 8%, it matters if you can afford the home, if you can make payments consistently for the next decade, and if you love/want/need the home.

If you’re making the purchase based on the mortgage rate, you’re either trying to time the market or you’re potentially just squeaking by.

And you could face affordability issues if property taxes rise, or insurance premiums increase.

You certainly don’t want to bank on the marry the house, date the rate strategy, which hasn’t worked out great the past few years.

Some seem to think they can buy now and perform a rate and term refinance later to lower their payment.

But there’s no guarantee mortgage rates will fall by a large amount, or that you’ll qualify when that time comes.

So instead of focusing on the rate, look at the big picture. Is it the right home for you? Is the price affordable? Do you picture yourself living there for the next 5-10 years or longer?

Does it make sense financially based on your income, assets, and employment? If yes, great, proceed. If not, maybe take a harder look at the situation.

And remember not to make the false assumption that there’s a strong relationship between rates and prices.

Should You Sell Your Home When Rates Are High or Low?

Again, mortgage rates are just one piece of the pie. There are many different factors to consider when buying or selling a property.

One needs to study supply/demand, home price outlooks, and the wider economy. As noted, there isn’t a strong relationship between prices/rates historically.

So if rates are low, you can’t just assume prices are going to skyrocket and that it’ll be a great time to sell your home.

Sure, it could be a good time to sell if demand increases. But what if rates fall because the economy is in the dumps? Fewer prospective buyers, lower prices, right?

It’s not so simple. If you’re selling and buying a replacement property, that’s another consideration.

Will it be easy to find a replacement? At the moment, selling a home is somewhat scary because inventory is so low in most places.

You could find yourself renting until a suitable property comes along. And who knows where rates will be then?

I know several people who sold at the supposed “height of the market” a few years ago to lock in profits.

But since then haven’t been able to find a new home to purchase. In the process, they’ve missed out on years of ownership and they face significantly higher interest rates today.

Long story short, don’t try to time a home purchase or home sale based on mortgage rates.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Well, here we are. It took longer than expected, but mortgage rates have finally strung together a decent rally after nearly three years of increases.

They fell below year-ago levels a week or two ago, per Freddie Mac, and took another big leg down after a softer-than-expected jobs report on Friday.

As for why, fewer new hires, increased unemployment, and slowing wage growth all point to a slowing economy. And interest rates tend to drop when the economy cools.

In addition, the Fed is expected to pivot and begin cutting rates, which could act as another tailwind for lower mortgage rates.

This has many thinking we’ll see another surge of home buyer demand, and potentially a big jump in home prices. But is it true?

Do Lower Interest Rates Actually Increase Home Prices?

It’s entirely logical on the surface. If something people want becomes cheaper overnight, demand for it should hypothetically increase.

And if demand increases, the price might rise as supply decreases, especially if there are already too few homes for sale.

But if that were true for single-family homes, why didn’t asking prices crash over the past year and change?

After all, rates on the 30-year fixed mortgage nearly tripled from its record lows in the mid-2s in early 2021 before peaking at just above 8% last fall.

Using the same logic above, home prices would surely nosedive as buyers fled the market, leading to a massive supply glut.

Instead, home price appreciation simply cooled off and home prices continued to increase in most parts of the country.

In fact, if you look at many home price indices, we have new all-time high home prices pretty much every month.

Home Prices Continued to Rise as Mortgage Rates Nearly Tripled

Just take this chart from the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.

Their latest report released on July 30th revealed that home prices increased a solid 5.7% from May 2023 to May 2024.

However, home prices were flat month-to-month from April after rising 0.3% a month earlier.

Still, if you look at the chart, you’ll see that home prices didn’t slow much as mortgage rates began their ascent at the start of 2022.

There was a brief pause as the housing market digested the near-tripling in rates, but then prices continued their ascent unabated.

So if we want to argue that there’s an inverse relationship between rates and prices, this last few years wouldn’t be a good example of that.

All we’ve really seen is a positive correlation between rates and prices, in which BOTH have risen together.

And now that mortgage rates appear poised for a bit of a rally, should we ignore that and say they have a negative relationship?

Can we say prices should have fallen when rates went up, but now that rates are falling they should go up even more?

Maybe There’s Just Not Much of a Correlation at All

Instead of trying to invent a relationship between mortgage rates and home prices, maybe we should just come to terms with the fact there isn’t a strong one.

And there’s nothing wrong with that. If you look at history, changes in mortgage rates and home prices are weakly related, this according to the Urban Institute.

I’ve posted this chart before, but here it is again if you don’t believe it. You’ll see all types of combinations of annual mortgage rate and home price changes.

These little dots won’t make it easy to make the argument that when mortgage rates fall, home prices rise. Or vice versa.

Instead, you’ll see instances when they rose together, fell together, or sometimes, to fit the popular narrative that isn’t necessarily true, went in opposite directions.

Of course, nominal home prices (not adjusted for inflation) rarely go down to begin with, so we don’t even have that many examples to look at.

Why Would Home Prices Fall If Mortgage Rates Got Cheaper?

Well, just look at the economy…sure, mortgage rates are important because they can make a big impact on affordability.

The lower the rate, the more a home buyer can afford, all else equal. In fact, a 1% drop in mortgage rates is worth an 11% decrease in price.

But this simplistic view ignores cash buyers. And it ignores the financial health of prospective home buyers who need to get approved for a mortgage.

Just consider the last few days. The stock market has gotten hammered, with the Dow Jones falling more than 1,000 points today and the Nasdaq off nearly 600 points.

This sell-off was sparked by concerns about the health of the economy, with weaker data expected to usher in Fed rate cuts.

There’s a good chance that softer data will be accompanied by lower mortgage rates too.

Simply put, signs of a slowing economy improved the odds for a Fed rate cut, and also gave bonds a boost, which are a safe haven for investors when times get tough.

But if households are in worse shape because of said data, you’re going to have fewer home buyers out there. You could also have more sellers, perhaps even distressed ones.

Taken together, we might have a situation where the supply of homes for sale rises and prices fall, despite a big improvement in mortgage rates.

So yes, home prices could in fact go down, even if mortgage rates are lower!

But that’s not a foregone conclusion either, and will likely be highly variable based on economic strength and individual market dynamics throughout the country.

The main message here is there’s no strong correlation any which way. Thinking otherwise might simply lead to disappointment.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
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Source: thetruthaboutmortgage.com

Apache is functioning normally

In case you haven’t heard, there’s talk of a “refinance boom” as soon as 2025. Yes, you read that right.

While it seemed like high mortgage rates were going to spoil the party for a long time, things can change quickly.

Thanks to the millions who took out high-rate mortgages over the past couple years, even a slight improvement in rates could open the floodgates.

But now more than ever it’s going to be important to go with the right lender, the one who ultimately offers the lowest rate with the fewest fees.

This is especially true now that banks and lenders are working hard to improve recapture rates for past customers.

A Refinance Boom in 2025? What?

First let’s talk about that supposed refinance boom. This hopeful news comes courtesy of the latest Mortgage Lender Sentiment Survey® (MLSS) from Fannie Mae.

The GSE surveyed over 200 senior mortgage executives and found that almost three in five (58%) expect a refinance boom to start in 2025.

And some even believe it could kick off later this year, though that would take a pretty big move lower for mortgage rates in a hurry.

Either way, many are now anticipating that the Fed will cut their own rate in September as inflation continues to cool.

This expectation may lend itself to lower mortgage rates as bond yields drop and take the 30-year fixed down with it.

Assuming this all plays out according to plan, we could see a nice uptick in mortgage refinance applications.

After all, some four million mortgages originated since 2022 have interest rates above 6.5%, with about half (1.9M) having rates of 7%+.

If the 30-year fixed makes its way down closer to say 6%, or even lower, many recent home buyers will be clamoring for a rate and term refinance to save some money.

Loan Servicer Retention Has Surged Higher Recently

Now let’s talk about something called “servicer retention.” In short, once your home loan funds, it is typically sold off to an investor on the secondary market, such as Fannie Mae or Freddie Mac.

Along with the sale of the loan are the servicing rights, which can either be retained or released.

If they’re retained, the originating lender collects monthly payments and keeps in touch with the customer for the life of the loan (unless servicing is transferred at a later date).

If the servicing rights are released, payment collection is handed off to a third-party loan servicer.

Lately, banks and lenders have been opting to keep servicing in house to take advantage of a possible future transaction.

It allows them to keep an open line of communication with the homeowner, pitch them new products, such as a refi or home equity loan, cross-sell, and more.

In the meantime, they also make money via servicing fee income, which can supplement earnings when new loans are hard to come by (as they have been lately).

Anyway, what many mortgage companies are realizing is that with servicing retained, they can mine their book of business for refinance opportunities.

So instead of you calling a random lender when the thought crosses your mind, they might be calling you first.

Will You Still Shop Around If They Call You First?

While it might sound nice to have a built-in reminder to refinance when rates drop, it might also deter shopping around.

The latest Mortgage Monitor report from ICE found that retention rates on recent loan vintages have surged, as seen in the chart above.

Loan servicers retained a staggering 41% of borrowers who refinanced out of 2022 vintage loans and 47% of those who refinanced out of 2023 loans.

In other words, they’re snagging nearly half of the refinance business on loans they funded just a year or two ago.

And the retention rate among rate and term refis on FHA loans and VA loans tripled from around 15% in the fourth quarter of 2023 to 46% in the first quarter of 2024.

This means you’re more likely than ever to hear about refinance offers from the bank that currently services your mortgage.

That’s great for the mortgage companies, since they get to earn money on loan origination fees, lender fees, and possibly selling the loan and/or servicing rights again.

But it might not be great for you if you just go with the first quote you hear. Speaking of, ICE also noted that 36% of borrowers “considered” just one lender before making a selection.

And 48% considered just two. Did they consider two or actually speak to two? Remember, shopping around has been proven to save borrowers money. Actual studies by Freddie Mac prove this.

So if you just say sure, let’s work together again, you could possibly miss out on much better offers in the process, even if it is convenient.

Personally, I’d rather get a lower mortgage rate than save a tiny amount of time.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process.

Source: thetruthaboutmortgage.com

Apache is functioning normally

They say to never say never. But why?

Because if you say it, whatever you said would never happen typically happens. Go figure.

Well, speaking of, Fannie Mae chief economist Doug Duncan recently said barring a “catastrophic economic event,” not to expect mortgage rates to return to 3% in our lifetimes.

I wrote about it on Twitter and it garnered a big reaction, with most saying he’s right. And others asking how old he was…

My take was that when I hear things like “not in our lifetime,” I naturally expect them to occur sooner rather than later.

How Did We Get 3% Mortgage Rates to Begin With?

Before we talk about the possibility of mortgage rates being 3% again, let’s discuss how they got there in the first place.

After the early 2000s mortgage crisis led to the Great Recession between 2007 and 2009, the Fed took action to lower its own lending rate (the federal funds rate) to nearly zero.

This was done to increase economic output by encouraging banks to lend money and for consumers and businesses to take out loans.

Despite the Fed’s best efforts, the economy continued to contract, leading to the advent of an unconventional monetary policy called Quantitative Easing, or QE.

Without getting too wordy here, the Fed began buying long-dated treasuries and mortgage-backed securities (MBS) to stimulate lending and turn the economy around.

Thanks to a very large, new buyer in the market, bond prices went up and their yields (aka interest rates) plummeted, as did consumer mortgage rates.

By the end of 2011, the 30-year fixed fell just below 4%, per Freddie Mac, as seen in the FRED chart above. And in 2012, it was in the low-3% range.

The Fed’s QE program was launched in 2008 and ran all the way until 2020, thanks to COVID-19 requiring an additional round.

Effectively, it was the perfect storm of a zero-interest rate policy (ZIRP) coupled with enormous buying of agency mortgage-backed securities. They currently hold over $2.5 trillion in MBS!

This led to the lowest priced 30-year fixed mortgage on record, and many lucky American homeowners got their hands on one.

Could the Same Thing Happen Again?

Anything is possible, which is why I say never say never. But as Duncan noted, it might take a bit of a catastrophe. Or possibly a major geopolitical event. Or both.

Some wrongly claimed we needed a pandemic to see 3% mortgage rates, but if you study the mortgage rate timeline, that’s simply not true.

As noted, the 30-year fixed was sub-4% all the way back in 2011, nearly a decade before COVID-19 reared its ugly head.

Yes, the pandemic led to even lower mortgage rates, with the 30-year fixed falling to a record low 2.65% during the week ending January 7th, 2021, per Freddie Mac.

But all it took was a Global Financial Crisis (GFC) to get us to 3% mortgage rates. Easy-peasy (kidding).

This isn’t to say it’s right around the corner, but it’s clearly possible. Of course, these might be generational events.

So lifetime might be the wrong word choice here, but generation could be right. As in, not in this generation. But perhaps the next one.

If a generation is around ~30 years, this means many people could see this same thing play out again, though maybe not very soon.

However, things tend to move a lot quicker these days and some argue that we live in a low interest rate world now where a return to double-digit interest rates is unimaginable.

And even long-term average rates could be unthinkable to some given how high home prices are these days.

If you consider the average 30-year fixed mortgage rate over the past 50 years, it’s around current levels of just over 7%.

If we throw out the extreme 1980s mortgage rates, the long-run average is closer to 5.5%. But that includes the crazy low-rate years over the past decade…

How About 4% Mortgage Rates?

While I do agree with Duncan’s general sentiment that a return to a 3% 30-year fixed is unlikely, at least anytime soon, we could get somewhat close.

It wouldn’t shock me to see a 30-year fixed start with a ‘4.’ As in 4.99%, or something to that effect.

Heck, the home builders are still offering special mortgage rate buydowns that low at this very moment.

And if you’re willing to pay discount points at closing, if/when rates moderate as inflation falls, a 4.99% rate could be within reach.

Even without points, rates could get close to those levels if the economy cools rapidly and the Fed begins cutting its own rate again.

Remember, bad economic news is a friend to mortgage rates, so if unemployment spikes, and production/spending declines, rates could come down pretty quick.

At this juncture, many expect the Fed to begin cutting rates as their inflation fight wanes, which if the 10-year bond yield cooperates, could lead to a 30-year fixed closer to 6% by 2025.

And maybe even lower if mortgage rate spreads normalize. This alone could get some borrowers back into the high-5% range without paying a ton at closing.

Of course, that’s all speculation and nobody really knows for certain which way mortgage rates might go.

What Are Your Options If 3% Mortgage Rates Don’t Return?

Even if the 3% mortgage doesn’t return, there are various options to lessen your mortgage interest expense.

For one, there’s always buying down your rate, which involves paying discount points upfront for a lower rate the entire loan term.

This is a form of prepaid interest where you pay more today, but potentially save a lot more over the loan term. You just have to keep the loan long enough for it to make sense.

There’s also paying extra on your mortgage, which depending on how much more you pay each month, could lower your effective mortgage rate to something closer to 4-5%, or even 3%.

The more you pay toward principal, the less interest you pay, which makes your mortgage operate more like a low-rate home loan.

We’ve also seen a resurgence in assumable mortgages, which allow a home buyer to take on the seller’s loan as well.

Many millions of existing homeowners have mortgage rates in the 2-3% range, so it might be possible to buy their house AND snag their low-rate mortgage.

One new service trying to make this process easier is called Roam. And there are others like it out there too.

Finally, if you’re buying a new home, look out for special rate buydowns from the home builder’s lender that offer a below-market rate.

Or if you’re buying a used home, ask for seller concessions, which can be used to buy down the interest rate.

And remember, you’re not necessarily stuck with your rate forever. If rates go down, look into a rate and term refinance to take advantage.

Source: thetruthaboutmortgage.com