What Is Going On With The Home Mortgage Market?

Purchasing a home is among the most significant financial decisions you can make.  There are various methods of acquiring a house, for instance, through cash purchase or mortgage. If you decide to use a mortgage to purchase or renovate your home, it’s best to speak with your local mortgage broker to get answers to all your questions.   

D. Shane Whitteker is the owner and chief broker at Principle Home Mortgage, a mortgage broker in Williamsport Pennsylvania. 

Why are mortgage rates going up? 

According to Whitteker, one cause of the increase in mortgage rates has been the removal of artificial constraints on the mortgage-backed securities market.   

“The federal reserve was buying large amounts of mortgage-backed securities, which started back in 2008. The federal reserve has been purchasing MBS at varying amounts each month since then until September of 2022. So, the Federal Reserve has artificially kept rates low for approximately 14 years,” Whitteker explains. “Removing them as a buyer has had a very immediate and significant impact on the MBS market.   Rates really are getting back to where they should be. Keep in mind that the Federal Reserve currently holds around 1. 93 trillion dollars of MBS on its balance sheet and will start selling them at some point. This will also put upward pressure on mortgage rates. This link shows a couple of graphs that illustrate the buying history of the Federal Reserve Bank. 

Will rates go higher?
 
While impossible to answer with absolute certainty, Whitteker believes the days of low interest rates are over, though he doesn’t foresee them rising much higher than they currently sit.   

“This is a hard question to properly answer with any certainty,” Whitteker says. “In my opinion we probably won’t see significantly lower rates in the near future or ever if the Federal Reserve stays out of the market (which they should).” 

Whitteker says the Fed’s involvement in the mortgage-backed securities market artificially kept interest rates down.  

“The problem with the Federal Reserve buying MBS is that they typically aren’t doing this for a short period of time to boost the economy through a difficult time,” Whitteker explains. “Unfortunately, this practice was kept up for close to 14 years creating a stability problem in the housing and mortgage market.”  

When will rates go back down? 
 
As mentioned, loan rates are dependent on several factors.  There are so many uncertainties regarding the Fed's actions. Also, there is no surety about how the state of inflation will be. But, most housing experts predict that the rates will go down slightly by next year, 2023.  

Why will rates go back down? 
 
Home loan rates will go down if the inflation pressure eases, consequently leading to economic improvement. As a result, the demand and supply in the real estate industry will normalize, hence slightly lower rates. However, the days of 3 and 4% home mortgage interest rates are probably gone forever. 

When should I think about refinancing my mortgage? 
 
“A mortgage refinance brings in a new mortgage in first lien position to pay off the existing mortgage debt and possibly other debts,” Whitteker says.  “Or a refinance could be used to pay off existing mortgage debt and get cash out for many purposes.” 

How does a mortgage refinance work? 

The refinancing process is less complicated than the actual process of acquiring a home.  The lending institution doesn't give you the funds unless it's a cash-out-refi.  Instead, they handle all the transactions on your behalf and use money to offset the current debt.  After that, you start making monthly repayments to the new loan.  The mortgage can be more affordable with better terms.  This helps you attain other financial goals.  

What is a rate buy down? How does it work? 

This is a technique where individuals repay the loan at a lower interest rate in the initial years.  The method works if you have a financial institution or seller providing the buy-down money.  They usually make a lump sum payment into an escrow account.  Then, you make payments depending on the bought-down rate.  

According to Whitteker, a rate buy down is best discussed with your local mortgage broker, as it is highly dependent on everyone's unique circumstances.  

“A rate buydown can differ based on the lender offering the program, but this will give you an idea of how this works in general. Typically, you see either a one-year buydown or a 2/1 buydown,” Whitteker explains. “A one year buydown will buy the rate down by 1% for one year, after that the rate goes back up to the note rate for the life of the mortgage. With a 2/1 buydown you should see the rate go down by 2% the first year from the note rate, and then the next year the rate will increase by 1% to be set at 1% below the note rate.  On the third year in the 2/1 buydown the rate will go back up to the note rate for the remainder of the life of the mortgage.”   

Whitteker notes that each buydown comes with a cost.  

“Depending on the loan amount and note rate, (actual interest rate for the mortgage you qualify for), you will see a cost associated with the buydown,” Whitteker says. “The cost for the one-year buydown is lower than the cost of the two year buydown. The buydown is typically required to be paid by the seller in the form of a seller concession.”  

Is buying down a mortgage interest rate worth it? 
 
“This really comes down to the numbers,” Whitteker says. “With the mortgage-backed security market being uncertain and somewhat unstable it costs more to buy the rate down than it would in a stable market. I tell borrowers that they need to consider how long they will live in the home, and we can do the math from there.” 

How far can you buy your interest rate down? 

Although the amount varies depending on the loan company and the borrower.  The standard buy-down is 1 to 2% for the loan’s first few years.  In the subsequent years, the interest remains the same.  This plan is beneficial because you aren't required to do a high amount in the initial years.  It is a perfect plan if you anticipate an increase in income in the future.  

What is the mortgage picture moving into 2023? 
 
Whitteker foresees a stabilization of the housing and mortgage markets going into the new year. 

“I think things will start to balance out in the housing market and demand should start to stabilize for homes.  Rates should also start to stabilize but this may be later in the year,” Whitteker says. “Due to what I call artificial market influence, lock downs, high spending with supply chain interruptions, the Federal Reserve buying larger amounts of MBS, the housing market has been destabilized in some ways. I think this imbalance will start to work it’s way out in 2023.” 

To learn more about your mortgage questions, contact the Williamsport mortgage experts at Principle Home Mortgage at (570) 980-9359.