Well, it’s been over a week since the Fed cut rates and mortgage rates went up.
While this may have come as a surprise to some, seasoned mortgage industry peeps didn’t bat an eye.
It’s pretty common for the Fed to do one thing and mortgage rates to do another.
Without getting too convoluted, the Fed adjusts short-term rates while mortgages are long-term rates, aka the 30-year fixed.
In other words, the cut (and future cuts too) were already priced in to mortgage rates. So much so that they actually increased over the past week in a sort of “sell the news” correction.
Are Mortgage Rates Still Dropping?
Fitch Ratings recently came out and said the 50-basis point Fed rate cut was already priced in to both the 10-year Treasury yield and 30-year fixed mortgage rates.
In addition, they argued that the 10-year yield, which tracks mortgage rates historically, has “less room to decline” because of that.
It basically already came down in anticipation and might be difficult to drop much lower. In fact, we’ve seen it rise since the Fed cut last week.
The 10-year yield was as low as 3.61% and now sits around 3.77%, putting some mild upward pressure on mortgage rates since then.
Rates actually looked destined for the high-5% range before pulling back and inching their way back toward 6.25%.
And with little economic data out this week, there’s been no reason for them to rally.
But next week we get the employment report, which could help rates resume their downward path if it comes in soft.
Maybe Low 5% Mortgage Rates By 2026
If the 10-year yield isn’t expected to get much better from here, mortgage rates will only be able to move lower with better spreads.
Currently, mortgage spreads are wide because of high prepayment risk, volatility, and general uncertainty.
Investors demand a premium to buy mortgage-backed securities (MBS) versus government bonds and recently they’ve asked for a lot more than usual.
Fitch puts the typical spread at about 1.80%, while I’ve long said it’s about 170 basis points. Either way, it’s markedly higher today.
It was nearly 300 bps at its worst in 2022. It has since shrunk to about 240 basis points, meaning it’s about halfway back to normal.
So if bond yields do indeed stay sticky where they’re at, you’ll need some spread normalization to get mortgage rates to move lower.
It’s certainly possible, and as I wrote a couple weeks ago, could result in mortgage rates falling about .50% from current levels.
That would put the 30-year fixed in the high-5% range, and even lower if a borrower is willing to pay discount points.
Mortgage Rates Unlikely to Fall Below 5% Before 2027
The rating agency also proclaimed that mortgage rates are unlikely to fall below the big 5% threshold before the year 2027.
That means at least another two years of “high rates” before mortgage rates are no longer a concern.
Again, that’s because the 10-year yield is expected to stay mostly level and only drop to around 3.50% by the end of 2026.
If the spreads are back to mostly normal by then, you can do the math and come up with a rate of around 5.30% (3.5+1.8).
Of course, this is all just a forecast and many of these forecasts have been wrong in the past. In fact, they’re rarely right. Most were wrong on the way down to 3% and the way up to 8%!
So who is to say they’ll be right this time around either?
I’m a bit more optimistic on mortgage rates because I think there are a lot of Fed rate cuts projected over the next 12 months, which haven’t all been baked in.
Similar to the ride up for mortgage rates, from sub-3% to 8%, the market was caught off-guard. This could happen on the way down too.
I can envision a 10-year yield dropping to the lower 3% range next year, when combined with some spread compression puts the 30-year fixed in the mid-5% range potentially.
And once you factor in points, lots of rate quotes in the high 4% range. For most home buyers, that would be acceptable.
But I’ve long argued rates are no longer the main sticking point. We’ve got home prices that are perhaps too expensive in many markets, along with sticker shock on insurance, taxes, and everyday goods.
Without a little home price easing, it’ll still be a tough sell for those looking to buy into the market, especially if the wider economy deteriorates.
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.
While lower mortgage rates have reinvigorated hope for the stalling housing market, 2025 might not wind up much better than 2024.
Sure, lower interest rates boost affordability, but there are other components to a home purchase that remain cost-prohibitive.
Whether it’s simply an asking price that’s out of reach, or rising insurance premiums and lofty property taxes. Or other monthly bills that eat away at the housing budget.
This explains why mortgage origination forecasts for purchase lending continue to be pretty dismal.
However, the emerging trend of rising mortgage refinance volume should get stronger into 2025.
2024 Purchase Volume Has Been Revised Down
A new report from iEmergent revealed that 2024 purchase mortgage originations are projected to fall in terms of loan count when compared to 2023.
In other words, despite lower mortgage rates, the number of home purchase loans is now expected to fall below 2023 levels.
However, thanks to an increase in average loan size, the company believes purchase loan volume will still see a modest increase of 3.5% year-over-year.
To blame is still-high mortgage rates, which peaked about a year ago and have since fallen nearly two percentage points.
But home prices remain elevated, and when combined with a 6% mortgage rate and steep insurance premiums and rising property taxes, the math often doesn’t pencil.
Adding to affordability woes is the continued lack of existing home supply. There simply aren’t enough homes for sale, which has kept prices high in spite of reduced demand.
Refis Expected to Jump Nearly 50% from 2023 Lows
On the other side of the coin, mortgage refinances are finally showing strength thanks to that pronounced decline in mortgage rates.
They bottomed in late 2024 when the 30-year fixed hit the 8% mark, with only a handful of cash out refinances making sense for those in need of payment relief (on other debt).
But since then rate and term refinances have picked up tremendously as recent vintages of mortgages have fallen “into the money” for monthly payment savings.
As noted a week ago, rate and term refis surged 300% in August from a year earlier and the refinance share of total loan production rose to 26%, the highest figure since early 2022.
Chances are it will continue to grow into 2025 as mortgage rates are expected to ease further this year and next.
iEmergent said they “expect rates to finally start declining in the months ahead,” on top of the near-2% decline we’ve already seen.
While many have argued that the rate cuts are mostly baked into mortgage rates already, which explained mortgage rates rising after the Fed cut, there’s still a lot of economic uncertainty ahead.
The 50-basis point came as a surprise to many and another one could be on deck for November, currently holding a 60% probability per CME FedWatch.
If it turns out the Fed has gotten behind the eight ball, 10-year bond yields (which track mortgage rates) could drop more than is already penciled in.
At the same time, there’s still room for mortgage spreads to compress as the market normalizes and adjusts to the new lower rates (and higher loan volumes ahead).
2025 Refinance Volume Slated to Rise Another 38%
Looking forward to 2025, the refinance picture is expected to get even brighter, with such loans rising a further 38% (in dollar amount) from 2024.
This will likely continue to be driven by rate and term refis as interest rates continue to improve and the millions who took out loans since 2022 take advantage of cheaper rates.
But it could also come in the form of cash out refinances, which will become more attractive as well.
Even if an existing homeowner has a rate of say 4%, something in the high-5s or low 6% range could work if they need cash.
This could be a reflection of increasing debts in other departments, as pandemic-era savings run dry.
Ultimately, homeowners have barely touched their equity this housing cycle, so there’s an expectation that it’ll happen at some point, especially with home equity at record highs.
You might also see this in the form of second mortgage lending, with HELOC rates expected to fall another 2% as the prime rate is lowered by that same amount over the next 12 months.
Meanwhile, iEmergent is forecasting a paltry 6.5% increase in purchase volume in 2025, pushing overall dollar volume growth to just 13.3%
As for why purchase lending is projected to be relatively flat next year, it’s a wider economy story.
If economic growth continues to decelerate and a recession takes place, a weaker labor market with higher unemployment could dampen home buyer demand.
So even if mortgage rates decline more as a result, you’ve got fewer willing and able buyers, despite lower monthly payments.
This explains the phenomenon of how home prices and mortgage rates can fall in tandem.
They might not, but it at least debunks the idea of there being an inverse relationship between the two.
Long story short, 2025 should be better for mortgage originators thanks to refis, but don’t get your hopes up on purchase lending seeing a big jump thanks to lower 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.
Whether you’re a dedicated DIYer or prefer to lean on professional guidance, the truth is clear: smart financial planning can save you a lot of money over time.
Below, I’ll share some recent examples of tactical planning moves I participated in, including how much money was saved.
COVID Panic
In March 2020, you could be forgiven for thinking: “the world is ending, and I want to sell everything.”
But with proper perspective and an investment policy statement – both hallmarks of sound financial planning – many investors stayed the course.
They rode the stock market down more than 30% from peak to trough. Ouch. Nevertheless, they rebalanced along the way, selling stable assets (like bonds and money market) to buy stocks. This is not natural behavior – in fact, it’s the opposite of natural (“run from the threat” not “run toward the threat”). It’s learned behavior through experience and education.
In the end, while others made portfolio mistakes that cost them 10%, 20%, or more – permanent impairment of capital that can never be recovered – the intelligent investor has a better portfolio than if the COVID crash hadn’t occurred.
What’s the value of a 10% mistake on $1M?
Bring Me a Higher Yield
A friend-of-the-blog recently sold his successful small business for ~$10M or so. Not your everyday event, to be certain. But it’s more common than I realized.
We sat down to spitball some ideas, and my honest advice to him was:
Put together a financial plan, which details future planned inflows and outflows of money. This would include some well-deserved near-term spending!
Pick an asset allocation that corresponds with that plan.
Then, dollar cost averages the money into that asset allocation (e.g. 4 large tranches of investment over 12 months, or something similar)
The problem: the idea of investing millions into the stock market concerned him. I believe good investing education can help this problem, but that education doesn’t occur overnight.
As we discussed next steps, I asked him, “Where is the money right now?”
The answer? In a large US bank savings account, earning 0.05% interest per year. That’s $5000 in annual interest on a $10M deposit.
So while we continued are long-term conversation about investing in the stock market, I gave him some vital near-term advice: seek out a higher yield via a brokerage money market fund.
In the ~18 months since I gave him that advice, his average yield has been ~4.5 – 5.0%. That’s ~$475,000 in interest on a $10M deposit.
Yes – a simple tip to be sure. But sometimes financial planning is all about identifying the simple fixed in your financial ecosystem that will provide $475,000 per year instead of $5,000.
He bought my coffee that day. Don’t tell Suze Orman.
The Car Loan
One of my clients bought a new car a few months ago and came to me with a simple question:
“Should I take advantage of the 0% financing they’re offering me?”
$40,000 cash out of pocket, or a $40,000 loan with zero interest?
The math is simple:
If she takes the loan, she can keep her $40,000 in a high-yield account (such as our previously mentioned money market account) and earn ~$1500 – $2000 per year in interest. There’s no downside. There’s no loan interest accruing against her.
$2000 a year isn’t life-changing money. But it’s easy money. Small, easy percentage points can move the needle over long periods of time.
Sneak Through the Backdoor
Another client of mine came to me as follows:
Early 30’s couple
High earners (total income ~$350,000 per year)
Using 401(k) accounts wisely, putting lots of extra money into a Joint Taxable brokerage account
I asked them if they’d looked into saving money in an IRA…
“Yep, we looked into it, but we earn too much money.”
They were partially correct. They do earn too much for “normal” IRA contributions, but they’re the perfect candidates for backdoor Roth IRA contributions.
I think we can conservatively calculate that backdoor Roth contributions will earn this couple an extra $100,000+ over the next 30 years.
Which House?
Another client lives in the greater Washington D.C. area and, with her growing family, faces an interesting question?
Where should we buy our forever home?
Their three options – Washington D.C. itself, Maryland, or Virginia – each come with their own financial pros and cons. We helped her weigh the following:
The cost of the homes themselves (e.g. how far a dollar goes)
The long-term cost of property and school taxes
The state tax benefits of home ownership
The impact of state income taxes on their earnings over the coming decades
The impact of state capital gains taxes on their long-term investing
Of course, this family must pick a home that’s right for their lifestyle. Finances come second.
But the maximum vs. minimum we calculated puts their range of possible at a net present value over $500,000. In other words, “House A” in the most expensive locality would cost them $500,000 more than that same house in the least costly locality, as measured in today’s dollars, over the next 30 years.
Then, as always, we should ask how our lifestyle and life plan might change with an extra $500,000?
The Value of a Basis Point
Portfolio reviews are vital.
If an expert looks at your investments and says, “You can accomplish the same asset allocation as you already are but could save 20, 30, or 50 basis points if you do it this way.” …what’s the value of that recommendation?
FYI: A basis point equals 0.01%. So, 50 basis points equals 0.50%
Smart, simple investing strategies don’t need to be overly expensive. While professional financial planners do need to charge for their time and expertise, they can and should also save their clients money by keeping investing costs low.
What’s a basis point worth?
Imagine a simple scenario. An average investor might invest for 35 years, socking away $10,000 per year and achieving a long-term average return of 8.00% per year. This investor’s final portfolio would be worth $1.86M. And in this case, each extra basis point of expenses along the way decreases the final portfolio value by $4500.
11 basis points adds up to $50,000.
The lesson is simple: keep fees low where you can, and make sure you’re getting value above and beyond the basis points you are paying.
What’s a “Cash Balance Plan?”
Finanical planning is a deep subject area, with many nooks and crannies I haven’t even heard of yet. One such example occurred this year, when my colleagues recommended a “cash balance plan” to one of my clients.
He’s a successful solopreneur who last year grossed about $700,000 in income. A lot of those dollars were taxed at the highest possible levels. His effective tax rate was north of 40%.
A cash balance plan is a defined benefit retirement account (whereas a 401(k) is a defined contribution account). In other words, it is like a self-funded pension.
Cash balance plans are especially beneficial when all of the following are true:
Solo business owners, or with a very small staff.
Business owners with high incomes who would benefit from putting away more tax-deferred dollars.
Business owners who are higher in age (as you’ll see below, the annual contribution limits are very high for older business owners).
This client can contribute about $200,000 into his cash balance plan this year, saving ~$80,000 on his 2024 tax bill. Those savings are likely to increase every year between now and his retirement.
Of course, he will eventually have to pay taxes on those dollars when he withdraws them in retirement. But in the meantime, he benefits from tax-free growth and, more importantly, from the flexible and planned nature of retirement withdrawals; we will help him plan those withdrawals at a much lower than ~40% tax rate.
Ugly Annuities
I dove deeply on annuities in episode 86 of The Best Interest podcast.
In short, the vast majority of annuities are:
Vastly over-costed.
Disappointing in terms of return on investment.
For that reason, 99% of us are best off never touching annuities in the first place. But what if you’ve already bought an annuity – what should you do then? As always, an essential part of financial planning is to “let the numbers be your guide.”
Annuities typically have “surrender fees,” which charge the owner an extra fee to exit the contract. These fees range up to 10% of the total annuity amount (e.g. $100,000 on a $1M annuity), and typically decay in size as the annuity matures. It’s common to see, for example, an 8% surrender charge in Year 1 of the annuity decay to zero surrender charge after Year 10.
Again, I have a client example. I’m working with an gentlemen who owned multiple annuities at various maturity level. We analyzed each one and showed him the potential upsides and downsides of dissolving those annuities, paying surrender fees, and then investing the proceeds into a moderate investment portfolio.
Together, we created a multi-year schedule to flip his portfolio to the light side of the force.
In the long run – say, over the next 20 years – I can confidently say he’ll save 1.5% per year on fees. And I can conservatively predict his new allocation will outperform the annuities by 3% per year (up to 5-6% per year if I’m being less conservative).
On his $750,000 portfolio over those 20 years, my conservative assumptions above lead to an extra $1.3M in compounding in his pocket.
The Power of Financial Planning
Smart financial planning is not about outperforming the stock market. Instead, it’s about identifying places in your personal financial ecosystem where you can and should be saving money, pay less taxes, earning better returns, reallocating assets, pay fewer fees, taking advantage of special accounts, etc. etc.
It’s about knowing all the rules of the game, and then playing it effectively. This article showed you just a few examples, including:
Avoiding 6- or 7-figure mistakes when the stock market panics
Earning simple higher yields on large sums of money. 3% on a million bucks is $30,000 per year!
Backdoor Roth contributions to earn someone an extra $100,000+ over 30 years
Optimizing a home purchase to the tune of $500,000 over 30 years
Keep investing fees low, or saving $4500 for every 0.01%
Utilizing complex tools, like a cash balance plan, to save 6- or 7-figures in lifetime taxes
Detangling ugly annuities, resulting in an extra $1M+ over 20 years
These are just a few of many examples, and none of them involved picking the winning stocks.
The real value of financial planning lies elsewhere.
Thank you for reading! If you enjoyed this article, join 8500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters before signing up.
-Jesse
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