While You Were Shopping
We've known, and have shared, for quite some time now that mortgage rates would be heading up. What we didn't know, was that they were going to go up all in one week. Happy 2022! While rate is an important factor when getting a mortgage, it's important to note that rate is only one piece of the puzzle, and it's actually a lot less important than many people think. Markets change, circumstances change, and there's daily volatility to consider. All of these things have an impact on getting the best mortgage for you, and the best mortgage isn't always the one with the lowest rate. To make matters worse for the rate-obsessed - chasing the best rate could cost you, and cost you a lot.
To kick off the new year, we've seen the biggest jump in rates in a single week in recent memory, leaving rates at their highest point in over 2 years. While this will cause sticker shock to mortgage shoppers that have been in the market recently, it's important to note that rates are still at incredibly low levels historically, and we're still well below market rates we saw spike as recently as 2018. That said, things happen fast, and markets almost always get worse for consumers faster than they improve, which is what we've seen to start the new year. The chart below shows mortgage bonds, which are the bonds traded that have a direct impact on mortgage rates. You can see they've gone lower throughout 2021 (when bonds go lower, rates go up), but from October to December, they traded in a fairly narrow range. This week though? They fell off a cliff! Rates have jumped more than .5% in just a week's time.
Zooming into a chart like this, you'll see huge drops this week day after day. What that means is for folks who talked with a lender on New Years Eve, but held off "until next week" to get things started lost "the best rate" at every lender. If they waited to see if pricing recovered, they lost that pricing too. And the decline continues. That means if someone talked with a lender Monday, and wanted to take a day to shop, the next day, Monday's pricing was gone - and not just at one lender, ALL lenders.
Who Does This Impact
This impacts mostly buyers or people needing to access their home equity soon. You can see on this chart how much impact each .125 increase in rate eats into buying power. Remember, rates have gone up more than .5 in just a week, so based on the numbers in the example below, a buyer who was preapproved to a maximum loan amount of $350k on Monday is capped at $329k today -a loss of $20,000 in buying power. What makes it an even tougher pill to swallow is that home prices continue to climb - so in a market where prices are rising and buying power is diminishing, the gap can widen quickly, and for some unfortunate people hoping to qualify for their maximum possible loan limit, they can be priced out altogether - in less than a week's time.
I've never focused much on rate. If someone can afford their mortgage payment, have a comfortable level of disposable income, and put some savings away, in my opinion, their rate is good for them! That doesn't mean anyone should pay more interest to the bank than they should, it just means there's no point in obsessing over rate. Just as the market has quickly pushed rates up, there are economic indicators showing we likely have a recession on the way. In most recessions (and when inflation gets under control) we see rates drop - that means those locking in higher rates today will still likely be able to get lower rates in the future. What is ALSO means is that taking an even higher rate today may make sense. Why? Because with higher rates, lenders can offer credit to closing costs (ever hear of "no closing cost" loans?). Having closing costs paid for today, and holding off on refinancing until rates dip can leave you with a slightly higher monthly payment, but can save you thousands of dollars in fees when the time comes to refinance in the future. This type of strategy is why it's so important to work with an expert mortgage advisor, and also why focusing on rate isn't really prudent.
But What About All That Interest Over 30 Years??
I've been helping people get mortgage loans for over 15 years now, and not a single one of my clients (there are hundreds, maybe thousands of them at this point) have the same mortgage they started with more than just a couple years ago. This is why focusing on things like "the total amount of interest paid over 30 years" isn't very practical. People don't keep their mortgages for 30 years. They rarely hold them longer than 5 years. Bigger homes, divorce, the births of children and increased family size, changing neighborhoods, retirement - life circumstances often result in the need for a new home, and we haven't even touched on those needing to access cash in the equity they have in their home. There are numerous reasons people refinance, or sell and buy homes, and in each of these situations, the mortgage goes away to be replaced by a new one - so the rate you see today will not matter in 30 years. And likely, it won't even matter in 3 years.
The Right Strategy Saves More Than The Lowest Rate
Rate is important. It impacts payment, and over the years, even small changes in rate can add up to big dollar amounts. But it's important to remember how different lenders arrive at the rates they offer - the highest rate companies are often paying their employees very well (sometimes, admittedly, too well, at the consumers expense!). But on the other end of the spectrum, the lowest rate companies are often hiring inexperienced people with no real world financial knowledge to help customers make the best choices. Working with the wrong lender can cost far more money than an extra .125-.25 in rate. A recent, real-life example was when we helped a friend get a home equity line of credit on his home. He was solicited by his loan servicer, and was getting ready to move forward with a full on cash out refinance, with over $20,000 in lender fees! Instead, we funded a line of credit for him with next to no closing costs and a payment cheaper than what the other loan would have offered. Working with the wrong strategy (the lender that solicited him had great rates, but poorly trained and inexperienced staff) would have cost my friend dearly.
Remember - while you're shopping the market's changing, and while you try to find "the bottom", the bottom could be falling out from under the market, as we've seen this week. Rate matters, but working with a professional you can trust to guide you matters far more. While you're shopping for the best rate, the best rates could be disappearing, and if you wait too long, you could miss a tremendous opportunity!