As Banks Raise Interest Rates and Mortgage Loan Qualification Criteria, What’s a Homebuyer to Do?

The collapse of Silicon Valley Bank sent shockwaves through the financial system. While its ripple effects will take years to unfold, Americans hoping to buy a house are already feeling the pain.

The entry barriers to the property market have always been higher than other assets, but fewer mortgage offers and higher interest rates are making it a steeper climb for the average American. Like much of the rest of the economy, the housing market remains in flux and remains resilient in the face of rising interest rates and inflation.  

Despite remaining relatively high, a slight decline in mortgage interest rates has recently rekindled demand among homebuyers. Sales of existing homes reached nearly 4.6 million in February, up 14.5% from January, per data from the National Association of Realtors. That figure is still 22.6% lower than February 2022, however.

Several indicators, including homebuyer and homebuilder confidence rates as well as average offers per property sale, point to a potential turning point in the market. Yet, with mortgage lending in decline and interest rates remaining high, homebuyers and owners are in a tough place. 

Mortgage Dips

Although changing conditions are luring more potential buyers to the market, a decline in mortgage credit might force many back to the sidelines. 

Recent data from property analytics firm ATTOM shows total mortgage lending dropped again in the last quarter of 2022. Down nearly 24.5% decline from the third quarter, it marks the seventh straight quarterly decline in a row. Banks and other lenders approved 1.52 million mortgages – the lowest quarterly volume in almost a decade. 

While mortgages are in retreat nationwide, some cities and regions are fairing better than others. Honolulu, Knoxville, Buffalo, and Charleston saw the sharpest drop-off, each seeing quarterly declines north of 40%.

One city in Texas and multiple cities in Florida faired better, with Tampa, Dallas, Orlando, and Miami experiencing more modest declines ranging between 15 and 18%. Red-hot demand is keeping credit flowing in these two large southern states. Having together increased their populations by around 1.5 million residents over the pandemic, Texas and Florida remain fertile ground for real estate.

Stay the Course

As always with property, location is king and could make all the difference when weighing up what to do in the current market.

“I recommend to most of my clients the same that I normally would – if you’re buying in a growing, in-demand area and your mortgage is affordable given your current budget; don’t stress,” says Blaine Thiederman, MBA, CFP. 

“Whatever home you buy, you should be prepared to stay in for at least 3-5 years given the volatility of the market and fees,” he added.

Tim Uihlein, Partner and Managing Director at Vincere Wealth, also recommends homeowner clients stick with their homes if they can afford to. 

He suggests renters do a cost-benefit analysis of either continuing to rent or taking out an adjustable-rate mortgage (ARM) for their first home loan, remembering to factor in all costs.

“It’s essential to weigh all factors when buying a home,” Uihlein says. “Many don’t consider the added expenses of property taxes, homeowner association fees, and even PMI (Private Mortgage Insurance) when calculating their monthly payment.”

Reworking Rates and Payments

Optimizing the interest rate and frequency of repayments on a mortgage can have a significant impact on the total cost of the loan and the time it takes to pay off the mortgage. 

“Anyone with a variable rate, such as a home equity line of credit, should strongly consider locking it in if a “float down” option exists,” says Uihlein. “That would be the most beneficial option if their lender allows them to lock the rate upon refinancing and if rates drop, to unlock and relock.” 

Rather than opt for either a fixed or variable rate, float downs offer the best of both worlds. This option enables borrowers to reduce (or “float down” their rate) when market rates fall but keep their original rate if market rates rise.

Borrowers can also make payments more regularly, from monthly to biweekly. 

“A powerful strategy to manage interest rates is to find a mortgage lender who will service their own loans and allow for weekly or biweekly payments,” says Ian Weiner, CFP and Owner, Lead Planner, Bespoke Wealth Solutions. 

“Ensure that the payments are applied as they’re received, rather than being held in escrow until the due date.”

“If you pay biweekly, you end up making an additional payment each year, which reduces your effective interest rate, and causes you to pay off the loan much earlier.”

Biweekly payments on a $500,000 mortgage at a 6% interest rate could save well over 100,000 in interest over the life of the loan. 

With lending running low and rates remaining high, now is an ideal time for homebuyers and borrowers to assess their options and make adjustments so they can better adapt to the new market realities. 

For many people, a house serves as both their primary dwelling and largest investment. Considering this, optimizing mortgages can ensure physical and financial security.

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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.