The rock-bottom mortgage interest rates that came about after the 2008 financial crisis and recession gave millions of Americans the opportunity to become homeowners. Rates remained historically low for more than a decade. When rates dipped below three percent in 2020, millions of families refinanced their mortgages, and millions more became homeowners.
Mortgage activity during the pandemic was so popular that more than forty percent of all active mortgage loans today originated in 2020 or later, according to a report from Bloomberg. For some homeowners, the low interest rate is a monthly reminder of their good luck in securing a mortgage at the most opportune time and at a historically low rate.
For other homeowners, the low interest rate represents a barrier to accomplishing anything with the home, whether it’s refinancing for equity or moving into a different house. A young couple with a starter home ready to move into a larger residence may feel trapped by the “good” fortune of their low interest rate.
During the pandemic, many Americans took the opportunity to move into their dream home, even if the house wasn’t within easy commuting distance of their job. Working from home gave families the freedom to move to a town of their choice rather than to a neighborhood dictated by a daily commute.
Today, some homeowners feel the pinch from employers who want them back in the office. Retired individuals are also finding it difficult to downsize when their new smaller home would cost more due to higher interest rates.
Getting Out of a Starter Home or Downsizing is Tough at 7%
Many homeowners don’t realize the incredible increase in the monthly payment of a loan at three percent versus seven percent. At their lowest point, mortgage loan rates dipped below three percent. By the start of 2023, rates were up to seven percent.
A homeowner with a mortgage balance of $300,000 and an interest rate of three percent would pay approximately $1,260 per month on their loan, not including any property taxes or home insurance.
For a homeowner with a mortgage balance of $300,000 and an interest rate of seven percent, on the other hand, the monthly loan payment would skyrocket to more than $1,900 a month. An article from CBS News indicates the average monthly mortgage payment is unaffordable for typical buyers.
Whether a homeowner wants to downsize, upsize, or just find a new place to live, the significant increase in the monthly loan amount represents a significant barrier, even if the new mortgage balance wasn’t any higher than the old mortgage.
Getting a new job in a different state, downsizing to a smaller home, and relocating to a larger home could all come with much higher costs, even if the new mortgage was lower than or equal to the original mortgage.
3% Mortgages Were Unique
For some prospective homeowners who already have a low-rate mortgage, there is the assumption that all one needs do is wait for those three percent mortgages to return. As soon as rates dip back down, refinancing won’t cost nearly as much.
Unfortunately, most economists and financial experts suggest that rates probably won’t fall back to three percent in the near future, if at all.
A mortgage company executive interviewed by Yahoo Finance indicated that it’s doubtful that mortgage rates will ever drop back down below three percent for 30-year fixed-rate loans. However, mortgage rates may dip to a pre-pandemic rate, closer to four percent.
Alternatives & Solutions for Refinancing Right Now
Waiting for better rates isn’t a luxury all homeowners can enjoy, especially if a major event impacts the family, like a new job in a different state, the birth of a child, or other significant life change.
Homeowners do have some options when they need a new loan or need to refinance despite higher interest rates. One option is to pursue an adjustable-rate mortgage (ARM).
These mortgages usually feature a lower rate than what is currently available for a 30-year loan for the first five or seven years of payments. At the conclusion of the introductory period, the ARM rate starts changing based on the current rates.
Getting an ARM today is one way to get a lower interest rate immediately when a homeowner has no choice but to move and get a new mortgage or refinance before rates come back down. An individual or family who plans on moving in five to seven years when the mortgage rate would start to adjust could also benefit from the lower rate of an ARM.
No One Has a Crystal Ball for Mortgage Rates
Financial pundits and real estate industry experts often try to tell the future regarding mortgage rates. Will rates go down after the Federal Reserve stops increasing its benchmark rate? Will changes to the health of the economy impact mortgage rates?
No one knows for certain how mortgage rates will change over the next year, so homeowners interested in moving, refinancing, or getting a new loan will need to think carefully about whether now is the right time to get a new mortgage or whether waiting for rates to fall represents a more affordable and more beneficial course of action.
If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].