The COVID-19 pandemic brought on historically low mortgage interest rates that fell below previous marks set during the market crash of the Great Recession.
Those low rates have been edging up for several weeks. At first, the bump was thought to be transitory, but the sharpest increase in inflation in 40 years continues to fuel a rise in the cost of borrowing.
“I always tell clients rates go down slowly, but they go up quickly,” said Daryn Peterson, vice president of residential lending at BlueLeaf Lending. “That’s been the case this spring. We’ve seen it in the last 30 days. They’ve gone up almost a full percentage point. I don’t think we’ll see 30-year fixed rate mortgages in the threes at the end of the year.”
Putting rate hikes in context
Joel Schaub, vice president of lending at Guaranteed Rate, emphasizes that even if rates rise to just above 4%, they would still be near all-time lows in any other time period other than the two years of the pandemic.
“These are still literally 30- to 40-year lows if you take out the two years for COVID,” Schaub said. “That idea that rates have spiked, that they’re drastically higher and people aren’t going to buy; that’s not really the case.”
For Tricia Brouwers, senior vice president and area manager at Wintrust Mortgage, it’s more a matter of timing for clients. Lenders can give buyers a range and can qualify borrowers at current market rates, but the sense of urgency stems from the right property becoming available.
“Regardless of what happens with interest rates, where it is today and where it is tomorrow could be completely different,” Brouwers said. “It’s about where interest rates are at the time that they actually have a contract and are locked in to buy a property with a closing date. Then we can determine what the rate could be from there.”
As a lending professional with more than 30 years of experience in the field, Brouwers remembers when double-digit interest rates were the norm. In recent years, however, even lenders became accustomed to single-digit rates.
“I remember the first time my client got under 10%, I was doing a happy dance just because it was under 10%, it was under a double digit,” she said. “I think we’ve been accustomed to such low interest rates for so long that even as a lender, it was very commonplace for a lender to say, ‘I don’t know that rates could go much lower. I don’t know that we’re going to see interest rates as low as this,’ yet the market continued to change. Rates continued to drop.”
Fear of missing out
Throughout the pandemic, mortgage rates below 3% induced first-time homebuyers to enter the market. Unfortunately for those buyers, the demand for homes far outstripped the supply – and that continues to be the case in many markets.
The resulting rise in prices often negated any deal that the would be buyer would land with their mortgage rate. Buyers who worried about missing out on purchasing a property while rates were low would bid significantly higher than the asking price.
“Buyers that haven’t bought before are having FOMO, fear of missing out,” Schaub said. “‘My neighbor’s brother got a rate of 2.75%, and you’re telling me my rates are going to be 3.75%. I better hurry up and buy a house.’ That’s leading to buyers’ agents offering more on a home than they probably should.”
Agents in some cases hype the potential rate increase as a reason for their clients to buy now when a more restrained approach might be appropriate. Between the agent pitching the deal and the client’s anxiety over possibly losing the chance to buy a home when rates are low, buyers can be locked into mortgages that may be difficult to pay off over time as the market changes.
Brouwers emphasizes the need to connect with each client individually, rather than use the specter of a rate hike to panic prospective buyers into making a decision.
“Logic makes you think, and emotion makes you act,” Brouwers said. “In my mind, it’s really about connecting to what success looks like to each individual, and what’s the path to help get them there. Interest rates really are not going to matter if there’s an inventory shortage, and there’s nothing for someone to buy.”
Easing rate increase jitters
The uncertainty of how high rates will climb in the coming months looms large against that backdrop of historically low interest rates. Rates will go up, but they may not have a dramatic effect on the cost of borrowing for a home.
Schaub said that when the Fed raises rates, it doesn’t mean that they call all the mortgage banks and tell them to raise rates that day. The process is well-choreographed and begins with an announcement to ensure Wall Street isn’t confused. Rates have been rising since about August of 2020, but it wasn’t until January that Wall Street really took notice, and bond yields started rising along with inflation. But rates for 30-year fixed-rate mortgages won’t necessarily continue to rise.
“There are two ways that agents are talking about this,” Schaub said. “They’re either understanding and they’re knowledgeable, or they’re just a salesperson trying to pitch a buyer to go and buy something because rates are going to go higher. The best narrative here for an agent would be to explain that a majority of the interest rate increases already have been factored into today’s mortgage rates. We shouldn’t see rates go much higher here, and there is even a chance that we see some dips coming up this summer and fall.”
Brouwer believes agents and lenders need to get to know their clients in order to find the best possible loan for their individual needs at a time when rates may be rising.
“We should be learning what success looks like to our clients, what they’re looking to achieve in homeownership, what they need their maximum payment to be,” Brouwers said. “We should be tailoring everything to that so it’s not fear-based, but fact-based and feeling. What does success look like to them as a family? What’s going to create an environment for them that they’re going to be happy in?”
Peterson recommends that agents refresh their clients’ pre-approvals. For example, clients who were pre-approved for a loan amount in September or October of last year who found a property may return to discover the payments have changed by as much as $400 to $500 a month due to the rate increases.
“For a $600,000 loan from the rate this fall to the rate now, if they were on the borderline of qualifying, that equates to almost $100,000 more in price,” he said. “Agents should make sure their clients have updated pre-approvals, because the buyer might not qualify for the same price.”
Some lenders are underwriting the entire purchase price so clients can make a purchase with a lower down payment, according to Peterson. Adjustable-rate mortgages are another option for agents to explore with lenders, he added. ARMs weren’t particularly advantageous when rates were below 3%, but such loans have come back into play.
“The fixed rates are almost 4%, where you can still get a 10- or 15-year ARM, in the high twos, low threes,” he said. “A lot of my clients are looking at ARM rates right now to keep the payment the same as what it was in the fall.”
The low rates of the last few years brought about a rise in the number of lenders focusing on the refinancing side of the business. Many of those same lenders are transitioning to the buy side of the transaction. While they may be well-versed in helping clients improve the terms of their mortgages, they might not be familiar with all of the aspects of bringing together a purchase loan.
“It’s now more important than ever for agents to partner with purchase-focused lenders,” Schaub said. “The lenders that the last two years were able to sustain themselves on refinances, they had one party to manage; they had the client that owned the home. That’s pretty easy. On a purchase transaction, I need to manage the expectations of the listing agent, the buyer’s agent, the sellers, attorney, the buyers attorney, the inspector and the client. It literally just comes from years of experience doing it.”
In Brouwers’ opinion, the level of expertise needed to successfully close a transaction makes finding a reliable, purchase-focused lender a necessity. The ability to handle both refinances and purchases enables a lender to create solutions based on a client’s needs.
“The different dynamic with someone that maybe doesn’t work with agents or isn’t as heavy in purchase volume is the deadlines that come along with that, the understanding of products and programs to meet needs, whether it’s a bond program to help with down payment assistance, which isn’t necessarily relative on a refinance transaction. It is about understanding whether clients in a competitive market can afford both homes. Lending isn’t a one-size-fits-all.”
senior vice president and area manager
vice president of lending
vice president of residential lending