By Christopher Alarcon
Wealth of Geeks
Wealth of Geeks
The latest Economic, Housing and Mortgage Market Outlook from Freddie Mac shows mortgage interest rates remaining above 7% through the month of April. Those rates are expected to stay there or slightly increase through the rest of 2024.
The average rate on a 30-year fixed mortgage recently stood at 7.17%, barely dropping from a high of 7.79% last fall.
That’s sent some potential homeowners to explore strategies to mitigate borrowing costs. These may include upfront payments to lenders and opting for adjustable-rate loans. However, these once-effective tactics prove less fruitful in the current climate.
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The declining impact of discount points and adjustable-rate mortgages
One increasingly common mortgage rate-lowering move involves purchasing discount points. Homebuyers buy points directly from lenders or banks and receive reduced interest rates. While this costs buyers more upfront, point purchases can trim loan borrowers’ overall term payments. According to the Freddie Mac report, this practice surged last year, with more than half of buyers (58.8%) opting in. These figures represent a sharp incline from just 31.3% of buyers doing so in 2021.
Despite its growing popularity, this strategy currently holds less power than it once did. The research indicates that buyers who purchased points achieved only minimal savings compared to those who didn’t.
A borrower with a $500,000 mortgage may pay $5,000 to reduce the rate by just 0.25%, ultimately yielding minimal monthly savings. These suboptimal returns prompt skepticism among buyers like Katja Pekrun, who opted against buying down her rate due to extended break-even timelines.
Adjustable-rate mortgages (ARMs) are also losing appeal amid soaring rates. Historically, ARMs offered lower initial rates than fixed loans, attracting budget-conscious buyers. However, recent market conditions have eroded such advantages as ARM rates are presently on par with — or greater than — fixed rates.
The inversion of the yield curve, where short-term rates exceed long-term rates, has further diminished the allure of ARMs. Consequently, buyers face fewer viable options to navigate the challenging mortgage landscape.
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Navigating mortgage market volatility: The rise of alternative strategies
Prospective buyers can leverage market dynamics by diligently shopping around for lenders offering competitive rates. Amid this ever-widening gap in offered rates, this move can manufacture savings opportunities.
With lenders adopting contrasting pricing approaches — keeping rates high to maximize profits or offering lower, more competitive rates to attract new clients — buyers who carefully consider and compare lenders’ offerings stand to benefit. As interest rates maintain control of the housing market conversation, other traditional rate-lowering strategies face scrutiny from buyers looking for innovative ways to navigate the ever-evolving mortgage landscape.
Amid challenges posed by soaring mortgage rates, borrowers are trying new tactics to secure more sustainable terms. One option gaining traction is mortgage assumptions, where buyers take over existing loans from sellers.
Despite mortgage assumptions’ surging popularity, the process can demand additional time and effort. Processing these transactions can trigger delays that leave buyers in limbo. Additionally, assumptions’ significant financial implications require buyers to bridge gaps between loan balances and home prices.
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Moving forward: Mitigating mortgage market volatility
As rate hikes overrun the housing market, experts predict an eventual ease. While Freddie Mac’s research shows falling rates will modestly increase home sale momentum, other industry leaders expect demand from millennial first-time buyers compounded by inventory shortages will buoy home prices. Professionals advise prospective borrowers to adopt a prudent approach, leveraging market dynamics and exploring innovative strategies to navigate the evolving mortgage landscape.
Despite economic headwinds and housing market hurdles, the landscape remains resilient. The United States economy grew in 2023 with the addition of 2.7 million jobs and sustained consumer spending.
However, as mortgage rates dictate market dynamics and experts cite the potential for reduced job growth, borrowers are advised to remain vigilant and adaptable in their approach to home financing.
While uncertainties persist, industry analysts anticipate a gradual recovery in home sales, albeit against the backdrop of lingering inventory shortages and tightening financial conditions. These developments underscore the importance of informed decision-making and strategic planning for prospective homebuyers navigating the current mortgage environment.
The average rate on a 30-year fixed mortgage recently stood at 7.17%, barely dropping from a high of 7.79% last fall.
That’s sent some potential homeowners to explore strategies to mitigate borrowing costs. These may include upfront payments to lenders and opting for adjustable-rate loans. However, these once-effective tactics prove less fruitful in the current climate.
—————
The declining impact of discount points and adjustable-rate mortgages
One increasingly common mortgage rate-lowering move involves purchasing discount points. Homebuyers buy points directly from lenders or banks and receive reduced interest rates. While this costs buyers more upfront, point purchases can trim loan borrowers’ overall term payments. According to the Freddie Mac report, this practice surged last year, with more than half of buyers (58.8%) opting in. These figures represent a sharp incline from just 31.3% of buyers doing so in 2021.
Despite its growing popularity, this strategy currently holds less power than it once did. The research indicates that buyers who purchased points achieved only minimal savings compared to those who didn’t.
A borrower with a $500,000 mortgage may pay $5,000 to reduce the rate by just 0.25%, ultimately yielding minimal monthly savings. These suboptimal returns prompt skepticism among buyers like Katja Pekrun, who opted against buying down her rate due to extended break-even timelines.
Adjustable-rate mortgages (ARMs) are also losing appeal amid soaring rates. Historically, ARMs offered lower initial rates than fixed loans, attracting budget-conscious buyers. However, recent market conditions have eroded such advantages as ARM rates are presently on par with — or greater than — fixed rates.
The inversion of the yield curve, where short-term rates exceed long-term rates, has further diminished the allure of ARMs. Consequently, buyers face fewer viable options to navigate the challenging mortgage landscape.
—————
Navigating mortgage market volatility: The rise of alternative strategies
Prospective buyers can leverage market dynamics by diligently shopping around for lenders offering competitive rates. Amid this ever-widening gap in offered rates, this move can manufacture savings opportunities.
With lenders adopting contrasting pricing approaches — keeping rates high to maximize profits or offering lower, more competitive rates to attract new clients — buyers who carefully consider and compare lenders’ offerings stand to benefit. As interest rates maintain control of the housing market conversation, other traditional rate-lowering strategies face scrutiny from buyers looking for innovative ways to navigate the ever-evolving mortgage landscape.
Amid challenges posed by soaring mortgage rates, borrowers are trying new tactics to secure more sustainable terms. One option gaining traction is mortgage assumptions, where buyers take over existing loans from sellers.
Despite mortgage assumptions’ surging popularity, the process can demand additional time and effort. Processing these transactions can trigger delays that leave buyers in limbo. Additionally, assumptions’ significant financial implications require buyers to bridge gaps between loan balances and home prices.
—————
Moving forward: Mitigating mortgage market volatility
As rate hikes overrun the housing market, experts predict an eventual ease. While Freddie Mac’s research shows falling rates will modestly increase home sale momentum, other industry leaders expect demand from millennial first-time buyers compounded by inventory shortages will buoy home prices. Professionals advise prospective borrowers to adopt a prudent approach, leveraging market dynamics and exploring innovative strategies to navigate the evolving mortgage landscape.
Despite economic headwinds and housing market hurdles, the landscape remains resilient. The United States economy grew in 2023 with the addition of 2.7 million jobs and sustained consumer spending.
However, as mortgage rates dictate market dynamics and experts cite the potential for reduced job growth, borrowers are advised to remain vigilant and adaptable in their approach to home financing.
While uncertainties persist, industry analysts anticipate a gradual recovery in home sales, albeit against the backdrop of lingering inventory shortages and tightening financial conditions. These developments underscore the importance of informed decision-making and strategic planning for prospective homebuyers navigating the current mortgage environment.
