August 22, 2023

Are You Ready for a Mortgage, and Which One is Right For You?

3-Minute Read
Navigating the Mortgage and Real Estate Markets in 2023

You can’t avoid hearing about mortgages every time the topic of inflation and interest rates come up in 2023. What’s the first thing the media outlets talk about when it’s time for an interest rate update? Where mortgage rates are. 

Housing has increasingly been a hot topic, especially as the pandemic took hold. Housing went from “Oh, let’s go see some more homes next weekend” to “We need to make an offer on it in 5 minutes!” after scrolling by it on Zillow. 

Why this happened is a debate among realtors, economists, and many others. The 3 main theories that have been consistently circulating as to the cause for runaway housing prices are:

  1. Housing shortages
  2. The ability to work from home, and for some, work from anywhere remotely. 
  3. Historically low interest rates. 

That last point is the main topic of today’s post. When the Federal Reserve, also referred to as “The Fed”, slashed interest rates for fear the economy would falter in the face of a global pandemic, that put gas on the fire of an already-hot housing market. 

Mortgages rates were so low, that it made it illogical for some to save money or invest, when they could borrow money for a home at 2.95%. 

In fact, according to The Mortgage Reports, the average rate in January 2021 was 2.65%, a new record low. A record! And this was while many people were flush with cash from keeping their jobs, and receiving stimulus money from the Coronavirus recovery. For comparison, mortgage rates were over 15% in the 1980's and have been trending downward ever since. 

Then, in 2022, as inflation started to affect Americans, the Fed started to ramp up the rates, aggressively at times, up over 5% and further. That’s higher than rates had been for 10 years!

Where does this leave us?

An interesting observation is even though rates have been increasing aggressively over the last several months, home prices have not come down by much. You might be thinking to yourself, “I can only afford a $540,000 home instead of a $700,000 home with these rates”, yet the house you were looking at slashed the price only by $25,000. 

What happens next in the housing market is anyone’s guess, as the mismatch between buyer’s finances and willingness to pay navigates the prices that sellers think they can still receive. 

What’s the Best Mortgage for You?

So, if this housing market and expensive cost of borrowing hasn’t discouraged you yet, what type of mortgage should you look for?

Remember, a mortgage generally consists of your principal (loan amount) and interest you pay on that principal (the mortgage rate)

There are several types of mortgages available from Conventional, FHA, VA, and USDA. Conventional mortgages are some of the most widely known. 

Normally you can choose between a 15-year fixed, a 30-year fixed, and ARM, or Adjustable Rate Loans. ARMs are riskier because after a fixed number of years (3, 5, or 10) they adjust annually. And if you find yourself in an interest rate environment like today’s, well your payments can go up substantially. 

15-year and 30-year fixed conventional loans are popular because the borrower knows what their monthly payment is going to be for the foreseeable future. The payment stays about the same for the life of the loan, making it easier to work into your overall budget and financial plan. Changes to property taxes and insurance costs can affect your overall mortgage payment depending on how your escrow is set up. The actual mortgage payment alone won’t change. 

What Kind of Loan Do You Qualify For?

15-year conventional loans can be beneficial if you can make it work. Not only is your home paid off in half the time as a 30-year loan, but you can also qualify for lower mortgage rates. 

This is because the lender sees you as less of a risk. You’re qualified to and will be able to pay them back in 15 years instead of 30 years. While ideal, these loans are also harder to pursue because of sky high housing prices, which in turn leads to burdensome housing payments for some. 

Therefore, obtaining a 30-year fixed mortgage may be easier to manage, especially since most can  refinance in the future as rates and financial situations change. Additional payments can also be made over the course of the loan to pay it off sooner, typically without penalties. 

So, if you have 20% or more of your home price saved for a downpayment, have a solid credit score, and can manage to keep your total housing costs under 30% of your net income, then you might just be ready for a mortgage, and a conventional fixed rate mortgage at that. 

Talk to your Pattern Financial Advisor about if taking on a mortgage is right for you at this time in your life. We’ll help you figure out the best way forward!

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