For the last ten years, mortgage rates have remained relatively steady and quite low. I knew those rates couldn’t last forever, but I certainly couldn’t have predicted the global events that have brought so much uncertainty, thereby sending economic markets on a wild ride and interest rates with them. Unfortunately, these rate changes are having a significant impact on the real estate market.
Let’s say you want to purchase a $500,000 home. You’ve saved up a 20 percent down payment ($100,000). On January 1, 2022, the rates were about 3 percent, so your monthly mortgage payment on a 30-year, fixed-rate loan would have been about $1686. Fast forward to August 1, and the rates were closer to 6 percent. This means your monthly payment would now be about $2398, a difference of $711 a month. If you could only afford to pay $1686 a month, with a 6-percent rate you’d have to find a house priced at $381,300.
Generally, it takes months or years for a 3-percent rate change, but recently, rates did bounce from 5.3 percent to 6 percent and back to 5.3 percent over the course of a single month. You might think that’s not a big deal, but using the $500,000 property above, the monthly mortgage payment would go from $2221 to $2398 and back to $2221, a difference of $177 per month, which changes the amount of the loan you can qualify for by $31,875. If you’re purchasing a home at the top of your affordability threshold and stretching your budget to reach $2221, a difference of $177 may very well mean you no longer qualify for your loan.
Typically, when you make an offer to buy a home, the offer is contingent on the property appraising for the purchase price and the borrower qualifying for a home loan with an interest rate they’re comfortable with. If mortgage rates jump while you’re in the process of buying your dream home and you cannot afford a higher monthly payment, you can either increase the down payment or renegotiate the purchase price to something you can afford; otherwise, you’ll have to find another home.
One way to add a little predictability to the home-buying experience is to lock in your mortgage rate as soon as you’re approved for a loan. As with most economic choices, there are costs and benefits. If rates go up, a locked rate remains steady and you will still be able to afford the property you want. However, rate locks come with a price. Depending on the rate and the lender, your fee could be nominal or substantial. That’s up to you and the lender to negotiate. The other downside is that if rates go down, your rate does not. It is locked.
While you may be locked with that lender, you could change to a new lender. However, you will not be able to recuperate any fees or costs spent with the first lender, nor can you get that time back and the terms of your escrow may not allow you to start over with a new lender.
If you can afford a higher fee, some lenders will negotiate a rate lock that only floats down, so you’re safe from rate hikes but you benefit from any rate drops. Lenders recoup this cost by spreading risk over all their loans and/or by charging a fee for that service — either with an explicit fee or with some other loan term. For example, Lender A may offer a rate of 5.5 percent, while Lender B may offer a rate of 5.75 percent that can float down.
Sometimes a more expensive underwriting fee indicates that a lender offers more services overall, one of which is a rate lock that floats down to benefit the borrower. As with any purchase, you need to balance expense with value. What are you getting for your money? Sometimes the best value isn’t the lowest price—ideally, you get what you pay for.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.