As always, our goal is to inform and educate our readers on mortgage rates, the factors impacting them, and provide tips for navigating the mortgage process.
Recent Changes in Mortgage Rates
Are There Any Recent Consumer Price Index (CPI) data Changes?
Indeed, there is! November’s CPI data, released Dec 13th, 2022, showed inflation was slightly lower than expected. Month to month core CPI was projected to rise .3% but only rose .2%. Year to year CPI data also rose less than anticipated. Since inflation has been markets’ (and Fed’s!) almost singular focus lately, two consecutive CPI reports showing lower inflation were cheered by bond markets.
“Gosh, does the difference between .2% and .3% monthly price gains really change mortgage rates? It seems insignificant.”
That difference matters, especially when inflation is at levels last seen in the 1980’s. MBS (the bonds composed of mortgages) prices rose dramatically after the report was released, moving up over 100 bps as shown in the chart below (all data courtesy of MortgageNewsDaily.com and MBSLive.net). What’s that mean for borrowers? Theoretically, and especially if those price gains are retained for several days, about 1% better pricing on their loans, which translates to rates dropping by about .25%. Note that while most of the gains were retained, by later Dec 13th MBS prices lost some of the morning’s advance. Remember that higher MBS prices mean lower rates/costs for borrowers.
“So now that inflation is waning, rates will continue to drop, the Fed will stop raising their overnight rate, and we could soon see mortgage rates back in the 2%’s?”
That would be nice, but it’s highly unlikely. It took a pandemic unprecedented in modern times to pull mortgage rates below 3%. Let’s hope we don’t have to deal with another one of those anytime soon! What we can safely say is that improved inflation data would influence the timing and amount of the Federal Reserve’s overnight rate hikes, leading them to more accommodative monetary policies. At a minimum, rates are now happily below their October 7%+ levels.
“I heard the Federal Reserve raised rates .5% December 14th and plans to continue future rate increases. Doesn’t that mean mortgage rates will rise too?”
The Federal Reserve sets the overnight interest rate (Fed Funds Rate) for banks to borrow money on the shortest possible terms. Since fixed-rate mortgages are based on longer term interest rates (particularly US 10-year Treasury yields), the Fed’s overnight rate doesn’t directly inform mortgages. It DOES, however, impact home equity and credit card rates, which will keep rising as Fed continues hiking their rate.
More on Home Loan Limits & Recent Changes
“I heard something about loan limits going up, what’s happening there?”
Great question! FHFA (the federal agency that oversees Fannie Mae and Freddie Mac) publishes new loan limits for the coming year every November. As housing prices rise, the loan limits follow. The 2022 base loan limit for Fannie/Freddie loans was $647,200. The new 2023 base loan limit? A robust $726,200, nearly a 13% increase as home values rose sharply. You can read more about the loan limit adjustments here: https://singlefamily.fanniemae.com/media/32871/display
“There’s a single loan limit for the entire country? How does that work when housing costs vary substantially from region to region?”
There are, in fact, high-cost housing areas (primarily the West and East Coasts) where Fannie/Freddie allow higher loan sizes. That limit for 2023 is $1,089,300, the first time $1M+ conforming loans have been available, even in high-cost areas. Two things to remember: the higher loan limits apply only in specific areas; Fannie/Freddie have additional pricing adjustments on high-cost loans, their pricing is NOT the same as loans below the new $726,200 loan limit. Also, these limits are for loans on single unit dwellings, multi-unit housing has higher limits. Buying a 4-family property in a high-cost area? You can now borrow up to $2,095,200 and still be in a conforming loan!
“Could you please explain the difference between conforming and jumbo loans? Is one better than the other?”
Conforming loans are those backed by Fannie Mae and Freddie Mac. These loans have published, uniform guidelines set by those agencies. That standardization makes originating and underwriting conforming loans predictable and straightforward. Jumbo loans, on the other hand, are not guaranteed by any federal agency. Individual lenders are free to set their own underwriting criteria. Jumbo loans often require higher “reserves” (verified buyer assets remaining after closing) than conforming loans, lower debt ratios, and higher credit scores as well. A 670-score borrower may qualify for a conforming loan, but most jumbo lenders won’t approve scores that low. While conforming rates change regularly (even multiple times per day, depending on bond market movement), jumbo rates typically don’t, and can be based more on lenders’ available capital than bond markets’ movement. As far as “which is better”, it depends on the circumstances. If you’re in a high-cost area and borrowing more than Fannie/Freddie’s baseline loan limit of $726,200, it’s worth comparing your jumbo options to Fannie/Freddie “high-cost area” loans.
More on Closing Costs
“I’ve saved up enough funds for my down payment, so want to buy a new house, but my realtor says I need money for ‘closing costs and prepaid expenses’ too. What are those, and how much will they be?”
This is a common question; glad we’re discussing it at the start of your home shopping process. Your down payment will be based on your new home’s purchase price, and you’ll likely have multiple options, such as 5%, 10%, 20% down, etc. Note, you can always make down payments larger than 20%. For simplicity, let’s say your purchase price is $200,000. A 5% down payment would be $10,000, 10% would be $20,000, etc. Closing costs are the costs associated with your loan, such as lender and title fees, recording costs, appraisal charges, etc. These costs can vary widely, depending on the state your property is in, lender and title company you select, and your purchase price. Your lender is required to give you a formal Loan Estimate within 3 days of your application, listing those costs to the best of their ability. ‘Prepaid expenses’ refers to insurance premiums, any transfer or property taxes due, funds set aside to set up an escrow account for future taxes/insurance, and the interest from loan’s funding date to the end of the month. Those are also shown on the Loan Estimate, but are more subject to change, since insurance costs typically aren’t known at the start of a loan, nor the exact closing date as well.
“When you say ‘costs vary widely by state’, are you talking a few hundred dollars or thousands?”
Business Insider recently published a list of each state’s average closing costs here: https://www.businessinsider.com/personal-finance/average-closing-costs Missouri borrowers paid an average closing cost of $2,061 on both purchase and refinance loans (no real estate transfer taxes in Missouri!). New York borrowers, however, paid an average of $6,168 for refinance closing costs and a whopping $16,489 on purchases due to NY transfer taxes. Think that’s high? How about Washington DC, where refinance closing costs average $6,502 and purchase loans’ costs average an eye-popping $29,888!
“I can swing my down payment, but don’t have all those closing costs/prepaid expenses too. Does this mean I can’t buy a house?”
Not necessarily. Borrowers lacking the funds for closing cost/prepaid expenses can obtain them from several sources: gifts from relatives, state programs (which vary widely and are based on specific maximum income restrictions), or homes’ sellers. In tight real estate markets, sellers often frown on requests for seller paid costs, but as rates rise and housing markets soften, they may be more amenable to providing sales concessions. One thing to remember, the amount of any gifts/seller concessions allowed varies depending on many factors: loan type and size, down payment, and even occupancy. Before planning on any gift/seller paid/state funds for your closing, discuss your particulars with your loan officer. The last thing anyone wants is for a purchase to not close due to confusion over what sales concessions are allowed!
“My parents gave me an envelope with $5000 in it as a surprise gift towards my home purchase, any concerns there?”
Your question is a great example of why open communication between borrowers and their loan officers is so vital. Lenders have to “source” all funds brought to closing or used for post-closing reserves. “Sourcing” means proving where the funds came from. A check from your parents for $5,000, accompanied by a matching gift letter and bank statement showing the funds are now available meets sourcing requirements. Handing your loan officer a bank statement showing a cash deposit of $5,000 doesn’t prove where the funds came from, and those funds would be considered unsourced. It’s crucial that you discuss all aspects of your purchase with your lender before you write a sales offer. He’ll be able to advise you more efficiently (and take a LOT of drama out of the process) if everyone understands what your plans are from the start.
Contact Us with Home Loan Questions
Homesite Mortgage offers conventional, USDA, FHA and VA loans to the states of Illinois, Michigan, Missouri and Florida. Our loan experts can help you navigate the process and answer any questions you have.