The housing market is experiencing a cooling period, with some of the hottest markets likely to see declines. In my pursuit to finance real estate and avoid missing out on opportunities, I discovered an encouraging aspect of the U.S. housing market. Mortgage rates are substantially lower for well-qualified borrowers than the figures widely reported.
A lot of chatter has been centered around the possibility of 5% or higher interest rates for 30-year fixed-rate mortgages potentially straining buyers. The thought of an interest rate hike from 3.25% to 6.5% does sound concerning, but it’s not a universal trend.
Since the global financial crisis of 2008-2009, lenders have tightened their regulations, and borrowers have become more financially responsible. My own experiences with refinancing since 2009 have become progressively more challenging.
Thus, I’m skeptical that home prices will plummet significantly. A 5-10% decrease appears realistic, with potentially steeper declines in cities with a large upcoming housing supply.
Why Are Many Borrowers Securing Lower Mortgage Rates?
A well-qualified buyer nowadays has over an 800 credit score and a debt-to-asset ratio under 30%. The bar has been raised since the financial crisis.
The increasing mortgage rates are leading more people to choose adjustable-rate mortgages (ARMs), which I’ve favored since 2003. Aligning the fixed-rate period of your mortgage with your intended ownership duration is a sound financial strategy.
ARMs generally have lower rates than 30-year fixed-rate mortgages. It isn’t financially sensible to pay a higher rate for a longer period than you plan to own your home or pay it off, especially considering the average U.S. homeownership tenure is around 10.5 years.
Though there’s growing worry about prolonged inflation, it’s essential to remember that inflation usually self-corrects over time. Fears of ARM borrowers with 5-10 years left on their fixed-rate terms being in danger fail to acknowledge this.
Surprisingly, only a small percentage of new mortgage borrowers are opting for ARMs, and the total mortgage market share of ARMs is 5%-6%. It’s noteworthy how slow Americans are to adapt after decades of falling interest rates.
While a 30-year fixed-rate mortgage provides peace of mind, it comes at a premium. It’s advisable to calculate this cost to determine if it’s justified.
My Personal Experience with Mortgage Rates
As I found my forever home in 2020, I hadn’t been actively seeking to buy a new house or acquire a new loan until recently. Before inquiring with my primary bank about the latest rates, I estimated they would offer a 4% – 4.35% rate on a 7/1 ARM.
The quoted rate was unexpectedly 3.25%, a whole percentage point lower than anticipated, and almost 2% below the average 30-year fixed rate. My desire to purchase increased significantly.
However, the mortgage fee quotes did disappoint me initially. After clarification with the banker, it became evident that the fees were rough estimates and the actual closing costs would likely be lower.
Big Loans, Big Opportunities
With a large loan, you have the opportunity to conduct a no-cost refinance, with the bank covering the loss of fees by charging a slightly higher rate.
I believe no-cost refinances are beneficial as they provide immediate benefits if the rate is below your existing mortgage rate, without the concern of a break-even period.
Key Takeaways About Current Mortgage Rates
- Well-Qualified Borrowers Can Get Better Rates: The quotes I received were in the 3% range, far better than I expected.
- Talk to a Mortgage Banker: Don’t just rely on averages; get quotes and compare rates among different lenders.
- Don’t Be Average Financially: Aim above average by investing in personal finance knowledge and saving at least 10% of your income.
- More Home Buying Opportunities Ahead: The downturn in the housing market may not be as harsh as feared, opening opportunities for patient, well-qualified buyers.
Risks and Opportunities
There is a risk of a sudden drop in interest rates for patient homebuyers, potentially closing the window for real estate bargains. However, this is not the time to take on debt to buy property.
Rather, targeted real estate investing without debt, like dollar-cost-averaging into REITs or private real estate funds, is advisable. Platforms like Fundrise offer focused investment options, accessible even with as little as $10.
The key is positioning yourself wisely to capitalize on opportunities as inflation shows signs of receding and the market trends turn more favorable. It’s about making well-informed decisions based on firsthand experience and a solid understanding of the current landscape.