Financial Planning

The Mortgage Market’s Wild Ride: What Does it Mean for You?

It’s not standard practice to feel you need to check mortgage rates on a daily basis. But just as everything else in our world has flipped on its head, that’s changed for the moment. Mortgages rates, historically one of the calmest elements of our financial planning lives, have turned into a Wild West scenario.

Between economic shocks, stimulus, and moves by the Federal Reserve, the typically staid market for residential mortgages has seen volatility usually reserved for stocks. On one day in mid-March 2020, rates on 30-year fixed loans went from about 3.5 percent to 5.0 percent. Since then, rates have been gyrating like a stock in the ‘90s. And it has become harder to get a mortgage – those with lower credit and those who need a cash-out refinance for renovations are seeing a tougher market with higher-than-average rates. Those who don’t have exceptional credit scores and need jumbo loans at or above $765,600 have seen that market dry up, as well.

When shakeups like this enter the picture, we make it our business to understand the root cause and the ultimate effect on those planning for their financial future. The current mortgage rate situation deserves attention from us – and maybe from you.

When Congress passed the CARES Act, it provided needed relief for millions of Americans who no longer had income to make their monthly mortgage payments. Two incredible options made available were a moratorium on foreclosures and a right to forbearance for anyone with a federally-insured loan.

The moratorium part is crystal clear: if you can’t pay your mortgage, no one can kick you out of your home in a foreclosure through May 17th.

Forbearance is where things get tricky. This is a waiver for monthly payments. You have to ask your loan servicer for permission, but if it’s a federally-insured loan, it’s automatically approved, the late fees are waived, your credit won’t be hurt, and “foreclosure and other legal proceedings will be suspended” according to the CFPB.

Sounds good so far, right? Individuals have the ability to defer mortgage payments, if needed, with no proof required, on their word that they need the help.

Unfortunately, this second part failed to take into consideration all the cogs in the mortgage machine, and it caused wild swings in the mortgage market because it was one-sided. When you get a conforming mortgage (under $510,400 nationally and up to $765,600 in “high balance” markets like the DMV in 2020) that meets specific criteria for income, creditworthiness, etc., it generally qualifies for an implicit federal backing through government-sponsored entities Fannie Mae and Freddie Mac, which are regulated by the FHFA. The lender and servicer can make the loan knowing that they’re indemnified up to a certain point from loss due to default.

While borrowers can apply to waive mortgage payments, mortgage loan servicers weren’t given the same forbearance option. They are still on the hook for paying bondholders who own the mortgages through mortgage-backed securities (by the way, read or watch The Big Short for a great explanation of these securities) for up to 4 months.

Think about that for a second – as a loan servicer, would you offer new loans to borrowers who could immediately turn around and take forbearance on that loan, leaving you on the hook for making the first 4 months of their payments? That oversight is leading to potentially low motivation for lenders.

That said, at the conforming loan limit of $510,400 and below with decent credit, the market is still incredibly competitive, according to Craig Strent, CEO of Apex Home Loans in Rockville, Md. As of this writing, rates for a 30-year fixed mortgage to a reasonably well-qualified buyer of a conforming mortgage were near 3.25; 15-year fixed rates were in the range of “high 2 percent to around 3 percent” according to Craig. Adjustable-rate mortgages (ARMs) are not currently priced competitively, so today (remember, these markets change by the hour lately), ARMs aren’t very attractive.

This may seem like a lot to digest. It’s our job to simplify it and determine whether these situations are actionable or not. In this case, the bottom line is that it’s worthwhile to review your mortgage situation. There are a few things you should think about:

  • If your rate is in the 4 percent or higher range, it’s worth reviewing to see if you can lower it
  • What are the interest savings? It depends on your mortgage size: if you have a $100,000 mortgage, you might need a more-than-2 percent  reduction to make it worthwhile to switch; if you have a $1 million or higher mortgage, you might only need a 0.25 percent reduction to make it worthwhile switching from a cost perspective
  • 30-year fixed is the place to be right now; ARMs are not currently providing much benefit for their flexibility

A good first step is to email your financial advisor to explore your options. We encourage AFM clients to send us a PDF of their latest mortgage statement. We’ll review that information and, if it makes sense, connect with a lender who can help refinance at a lower rate and increase cash flow.

To discuss this unique rate environment and how it could impact you, contact us.