Maybe Homeowners Are Struggling With The Price Of A Home Loan

When mortgage rates fell sharply in early 2022, the housing market stalled.

In less than 10 months, 30-year mortgage rates rose from the low 3% range to over 7%.

While a mortgage rate of 7% is historically “reasonable,” a percentage change in such a short period of time was unprecedented.

Mortgage rates rose about 120% during that time, which was actually worse than those 1980s mortgage rates you’ve heard about the speed of change.

The rapid rise in interest rates was hard enough to introduce us to a new phrase, the mortgage lending rate.

In short, existing homeowners were locked into their properties seemingly overnight because they couldn’t afford to leave their lower rates and switch to higher rates.

It could be because it was cost prohibitive or simply unattractive to do so.

And there’s no quick fix because your average homeowner has a 30-year mortgage in the 2-4% range.

Mortgage Rates Are Down, But What About Mortgage Rates?

There has been so much focus on mortgage rates that sometimes I feel like everyone has forgotten about high mortgage rates.

Mortgage rates peaked at 8% last year, but have since fallen to around 6%. And it can be found even less if you pay discount points.

So in a sense, the level of mortgage lending has decreased, yet the availability of housing remains lagging.

For the average home buyer who needs a loan to make a deal, there are two main parts to the buying decision. The asking price and the interest rate.

As noted, rates are higher than ever, but down about two percent from their 2023 peak.

The 30-year note reached 7.79% during the week ended October 26, 2023, which was not far from the 21st century high of 8.64% set in May 2000, per Freddie Mac.

However, home prices are not falling. Although many seem to think that there is an inverse relationship between mortgage rates and home prices, it is not true.

Sure, appreciation may have fallen from its wildest levels, but prices have continued to rise despite remarkably high levels.

And if we look at where home prices were to where they are today, they’re up about 50% nationally.

In some metros, they have increased significantly. For example, they are up nearly 70% in Phoenix since 2019, according to the latest Redfin data.

So when you look at how mortgage rates have fallen, you might start focusing your attention on home prices.

While a 5.75% mortgage rate seems attractive at this point, it may not be pencil-inducing when combined with a doubled loan amount.

This may explain why just 2.5% of homes changed hands in the first eight months of 2024, according to Redfin, the lowest turnover rate in decades. The listings are also at their lowest level in more than a decade (since at least 2012).

Example of Lock in Loan Amount

Let’s consider a moderately priced home in Phoenix, Arizona. It was $265,000 back in August 2019, per Redfin.

Today, it’s closer to $450,000. Yes, that’s the 70% increase I mentioned earlier. Now let’s imagine a home buyer putting down 20% to avoid PMI and get a better loan rate.

We may be looking at a rate of 3.50% on a 30-year deferred in mid-2019. Today, that rate would be closer to 5.75%.

If we look at both the maximum loan rate and the maximum loan amount, the difference is about $1,150 per month. Mainly and interest.

The down payment is also $90,000 versus $53,000, or $37,000 more, which would be a deal breaker for many.

This explains why so few people buy homes today. The one-two punch of a high mortgage rate AND a high sales price put it out of reach.

But the good news is that if the loan amount was the same, the difference would be only $285, even at a rate of 5.75%.

So you can’t blame the very high prices at this time. Sure, $300 is a lot of money, but it’s not that much to pay each month.

And it’s much better than the $1,150 difference in the maximum loan amount.

In other words, you could argue that existing homeowners looking to relocate aren’t locked into their mortgage so much as they are the mortgage.

What You Can Do To Fight A Foreclosure Loan

If you already own a home and are trying to figure out how to move, there is a possible solution.

I actually had a friend do this last spring. He was walking into a large home in a prime location, despite having a 2.75% 30-year mortgage.

To cope with the huge increase in interest rates, he used the money he got from selling his old house and used it to take out a new loan.

The result was a very small balance, despite a high-quality mortgage. This meant very little interest accrued, despite the high monthly payments.

He did this while rates were in the 7% range. It is more likely that he will apply for a rate and term refinance to get a rate in 5 years, at which time he can go with a new term of 30 years and reduce every month.

If he likes, he can make additional payments to the principal to continue saving on interest, or enjoy repayment flexibility.

In any case, reducing the amount of the loan to something comparable to what he had before, using the proceeds of the sale, is one way to close the gap.

And the big silver lining for many existing home owners who are locked in is that they get cheap money and have a ton of home equity at their disposal.

Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.

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