Well-Qualified Borrowers Are Paying Much Lower Mortgage Rates


House prices have cooled and will likely decline in some of the hottest markets. However, on my quest to get financing to conquer my real estate FOMO, I realized a positive datapoint for the U.S. housing market. Well-qualified borrowers are paying much lower mortgage rates than the headline rates you see in the news.

There has been a ton of talk about how 5%+ interest rates for 30-year fixed-rate mortgages will really put a squeeze on buyers. If you have to go from paying 3.25% to 5.25% for a new mortgage, I’d believe it. However, I don’t think that’s exactly what’s happening for all borrowers.

Since the 2008-2009 global financial crisis, lenders have become much more strict. At the same time, borrowers have gotten much more qualified. I’ve refinanced multiple mortgages since 2009 and each time was more painful than the last.

Therefore, I doubt home prices will drop too much. A 5-10% decline seems reasonable. But for those cities with a surge in upcoming supply, the price drops could be more severe.

Why Plenty Of Borrowers Are Paying Lower Mortgage Rates

Let’s first define what a well-qualified buyer is. A well-qualified buyer is someone who has over an 800 credit score. In addition, the borrower has a debt-to-asset ratio of less than 30%. Before the financial crisis, borrowers with a 760 credit score or higher were getting the best mortgage rates. Now the hurdle is higher.

With a rise in mortgage rates, more people are getting adjustable rate mortgages. They have long been my preferred type of mortgage since 2003. Matching the duration of your ownership with the fixed-rate period of your mortgage is an optimal financial move.

ARMs have lower rates than 30-year fixed-rate mortgages. To pay a higher mortgage rate for a period much longer than you plan to own your home or pay it off doesn’t make good financial sense. The average homeownership tenure in America is about 10.5 years.

There is currently elevated concern that higher inflation will last for longer. However, inflation is a self-correcting mechanism that eventually reduces demand and brings down inflation.

To think ARM borrowers who have 5-10 years left on their fixed-rate periods are doomed fails to recognize inflation normalization.

U.S. historical inflation chart through February 2022

Yet still, less than 10% of new mortgage borrowers are getting ARMs. Meanwhile, only about 5%-6% of total mortgages consist of ARMs. It’s surprising how slow Americans are to change after 40+-years of declining interest rates.

The peace-of-mind premium you pay for having a 30-year fixed-rate mortgage has value. Just make sure you do the math to calculate exactly how much you will be paying for this certainty to see if it’s worth it.

Interest Rates On Adjustable Rate Mortgages May Be Lower Than Expected

One of the main reasons I write from firsthand experience is because important details are often missed compared to just reporting the news. Money is too important to be left up to pontification. It’s better to experience something directly to go through the various nuances.

Because I found a forever home in 2020, I hadn’t been in the market to buy a new home or get a new loan until now. Like many of you, I was just monitoring the latest 10-year bond yield and headline mortgage interest rates.

Therefore, before inquiring with my main bank about the latest mortgage rates, I estimated the bank would respond with a 4% – 4.35% interest rate on a 7/1 ARM.

As I currently have a 7/1 ARM at 2.125%, I just mentally added 2% to my rate since that was the average mortgage rate increase since early 2022.

10/1 ARM Offer Example

Unexpectedly, here’s what I was offered. The below rates are based on a $4.125 million loan after putting 25% down on a $5.5 million house. I figured, might as well ask for the maximum to see what Citibank has to offer and go down from there if the money is not needed.

The rates also assume I remain a Citigold client with $2 million or more in assets post the down payment. Relationship pricing helps lower mortgage rate offers between 0.125% – 0.375%.

Latest mortgage rates for borrowers - 10-year adjustable rate mortgage quote from Citibank

The left side of the chart shows a 10-year adjustable rate mortgage at only 3.25% with -0.125 points, $11,955 in fees, and a $17,952 monthly mortgage payment. The payment includes principal and interest.

The right side of the chart shows a 10-year adjustable rate mortgage at only 3.25% with 0.125 points, $22,267 in fees, and only $11,172 a month in payments. The payment is interest only.

The quoted 3.25% mortgage interest rate was 1% lower than expected. Further, it is ~2% lower than the average 30-year fixed-rate mortgage. As a result, my interest in buying this new forever home went up!

The only thing that bummed me out were the mortgage fee quotes. So I asked the banker to clarify.

Clarification On Mortgage Fees For Borrowers

Here’s what the banker said.

“The fees are a guesstimate that the pricing engine uses. A lot depends on the final loan amount and the location of the property—title companies, escrow companies, appraisers rates vary a lot across the state.  The actual closing costs are almost always less than these estimates. When a property is finalized, you will get a loan estimate accurate to the penny within a day. 

Also, you will see that the estimate on the left has negative 0.125% points (in other words, a credit to you of about $5200) at the note rate I selected. The one on the right has a positive charge of 0.125 which means in addition to the third party fees, Citi is charging you 1/8 of a point for that specific note rate.  When I quote rates, I try to get as close to zero as possible. 

There is a wide range of note rates and if you want we can raise the note rate and increase the credit and apply that credit to “pay” all the 3rd party fees. Conversely if you want a note rate in the middle to high twos we can do that too, but the points will increase. 

On a loan this big, the $$$ amount of even an eighth change is huge.”

Big loans, big fees indeed! Bigger loans is the main reason why you can conduct a no-cost refinance. The bank will simply charge you a slightly higher rate to cover the loss of fees and then some.

A Comparison Of Mortgage Rates Based On Points And Credits

Personally, I think it’s better to get a no-cost refinance. Even though you will be paying a slightly higher rate, if the rate is below your existing mortgage rate, you will be instantly winning from day one. You won’t have to worry about break-even periods. Thus, if you decide to sell six months after refinancing, you will have still gotten six months of winnings.

As to getting a new no-cost mortgage that’s higher than your current mortgage rate, this decision is trickier. You must first calculate the breakeven period based on the fees and then estimate how long you think you’ll own the mortgage.

Below is a screen shot of a range of paying points (fees) for lower mortgage rates and receiving cash credits for higher mortgage rates.

Mortgage rates and fees example by points and credits and rates

My eyes immediately zeroed in on the lowest rate where I would still get a credit, which was 3.375%. Then I looked at the $55,077 credit I would receive if I agreed to paying a 3.625% mortgage rate. Very enticing!

Takeaways About Mortgage Rates And Money In 2022

The first takeaway from this exercise is well-qualified borrowers can get much lower mortgage rates than what we read in the headlines. I thought I was going to be quoted 4% – 4.25%. Instead, I got quotes in the 3%-range. Further, I thought the 4% – 4.25% quote was going to be for a 7/1 ARM. Instead, I got quotes for a 10/6 ARM ( rate adjusts every six months after the 10-year fixed-rate period is over).

Related post: The Difference Between a 5/1 ARM and A 5/5 ARM

Average FICO credit score in the United States through 2021

The second takeaway from this exercise is to actually get some mortgage quotes and talk to a mortgage banker. You might be surprised by how much better mortgage rates you can get.

Citibank has traditionally not had the lowest mortgage rates. Therefore, I’m now going to reach out to Chase and Wells Fargo to see if they have even better rates. I’m also going to get a free quote online with Credible since it’s easy and free to do. Then I’ll make the lenders compete against each other.

The third takeaway is to not take averages at face value. Whenever you hear a soundbite like “50% of Americans can’t come up with a $400 emergency expense,” take it with a grain of salt. Identifying who is average is very difficult given we all have our unique set of circumstances.

The fourth takeaway is to not be average! You can easily be far above average financially if you just read a great personal finance book and start saving and investing just 10% of your income. The average American doesn’t read personal finance books and has gone back to saving less than 5%!

More Home Buying Opportunities Are Coming

Not all homebuyers are getting as squeezed as much as you might think. Especially since the vast majority of existing mortgages have rates below 4%. As a result, the downturn in the housing market likely won’t be as severe.

If you’re a well-qualified buyer with a lot of cash on hand, be patient for more upcoming opportunities. As you can see from the latest home purchase mortgage applications index for the U.S., interest has declined.

US Home Purchase Mortgage Applications Index

The one risk for patient homebuyers is a potential sudden decline in interest rates. If inflation peaks by say August 2022, mortgage rates will likely decline causing a risk-on appetite for many asset classes, including real estate. If so, the short window for getting a real estate bargain will close.

Then it’s back to bidding against people who seem to have an endless supply of funds again.

Reader Questions

Are you getting quoted much lower mortgage rates than the reported averages? Are you more inclined to take out an ARM versus a 30-year fixed-rate mortgage? If you are in the lending industry, what types of loans are more borrowers gravitating towards?

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