House prices are cooling down, and in some hot markets, they might even drop a bit. On my journey to secure financing, I’ve noticed something positive about the U.S. housing market: well-qualified borrowers are getting much lower mortgage rates than what you typically see in the headlines.
There’s a lot of chatter about how mortgage interest rates over 5% for 30-year fixed-rate mortgages could strain buyers, especially those jumping from rates like 3.25% to 6.5%. However, not all borrowers will face these high rates. Since the financial crisis, lending standards have tightened, and borrowers have become more creditworthy. I’ve personally refinanced several times since 2009, and each time it’s gotten tougher.
So, I’m skeptical that home prices will plummet drastically. A drop of 5-10% seems plausible, but in areas that have overheated, the decline might be sharper.
Let’s talk about what defines a “well-qualified buyer.” Nowadays, this means someone with a credit score above 800 and a debt-to-income ratio under 30%. Previously, a 760 score would snag the best rates, but today, you need to clear a higher bar.
With the uptick in mortgage rates, adjustable-rate mortgages (ARMs) have become more appealing. I’ve preferred ARMs since 2003 because aligning the fixed-rate period with how long you plan to keep your mortgage is a smart financial strategy. Considering that the average American holds onto a home for about 10.5 years, locking in a 30-year fixed rate often doesn’t make sense.
Amid concerns that high inflation might linger, it’s important to realize that inflation often corrects itself by dampening demand, which in turn lowers prices. It’s a mistake to think that ARM holders, especially those with 5-10 years left on their fixed rates, are in trouble due to inflation adjustments. Surprisingly, fewer than 10% of new mortgages are ARMs, which shows a reluctance to shift away from the traditional 30-year fixed-rate mortgage despite decades of falling interest rates.
The certainty of a 30-year fixed-rate mortgage does come at a cost, but it’s vital to crunch the numbers to see if the peace of mind is worth the price.
From personal experience, I’ve found that the actual mortgage offers can differ significantly from what’s reported. I recently looked into financing for a new home purchase and expected a rate of about 4% to 4.35% for a 7/1 ARM based on my current 2.125% rate plus an average increase. However, I was quoted a much lower rate of 3.25% for a 10/1 ARM, which was about 1% lower than anticipated and roughly 2% below the average for a 30-year fixed mortgage. This has definitely made the prospect of buying more appealing, despite some high fee quotes which the banker explained could be much less in reality.
To wrap up, well-qualified buyers can secure much better rates than the general headlines suggest. My advice is to get actual quotes and not just rely on advertised rates. Banks like Citibank may not always offer the lowest rates, so shopping around with competitors like Chase and Wells Fargo is a good idea. Also, remember that not everything you hear about financial averages should be taken at face value—personal circumstances vary widely.
If you’re considering buying a home soon, don’t rush. The market is shifting, and more opportunities are likely to emerge, especially for those with strong financial standings. If inflation stabilizes, we might see a brief period where real estate deals are plentiful before the market heats up again. In the meantime, consider investing incrementally in real estate through REITs or private funds, which can be a more measured approach to entering the market.
