It's important to plot out a mortgage strategy even as rates fall
Lower mortgage rates could be the proverbial shiny object to which many of us would gravitate. One mortgage industry veteran, however, cautions against succumbing to the singular focus of declining rates.
It’s a lot more complicated than that. Choosing a mortgage isn’t just about the rate, Rebecca Richardson (pictured), of Kind Lending, explained. It’s about the overall package – including fees, terms, lender reputation and how it aligns with one’s financial goals.
“There’s a lot of math and complexity and nuance that goes into deciding what loan program is best,” she said. “It seems so much better to just push the easy button and say ‘let me go with the option with the lowest rate’.”
Fed’s last meeting set the stage for lower rates
At its last meeting in December, the Fed opted not to increase the interest rate in its effort to tamp inflation – a departure from the 11 rate hikes it had undertaken since March 2022. As a result, mortgage rates began to drop almost immediately as the market reacted to the Fed’s decision.
In a news release, the Federal Reserve explained its reasons for leaving the interest rate alone at its December meeting: “Recent indicators suggest that growth of economic activity has slowed from its strong pace in the third quarter,” officials explained. “Job gains have moderated since earlier in the year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.”
Other factors figured in the decision to not increase the interest rate: “The US banking system is sound and resilient,” Fed officials explained. “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The average 30-year fixed-rate mortgage was 6.62% for the week ending Jan. 4 per Freddie Mac’s most recent Primary Mortgage Market Survey. That’s down from 7.59% in September 2023.
“Between late October and mid-December, the 30-year fixed-rate mortgage plummeted more than a percentage point,” Sam Khater, Freddie Mac’s chief economist said in a news release. “However, since then rates have moved sideways as the market digests incoming economic data. “Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds. While lower mortgage rates are welcome news, potential homebuyers are still dealing with the dual challenges of low inventory and high home prices that continue to rise.”
Hence Richardson’s warning. She advises not to choose a lender at the time of contract – regardless of the rate offered. “Here’s the thing,” she said. “Because of all those variances and day-to-day market changes, rates and what you pay for that rate will vary, both from lender-to-lender or from a friend and co-worker.”
It’s like going to the doctor’s office
She likens plotting out a mortgage strategy to going into a physician’s office. “Just like when you go to the doctor, and you get blood work and they give you advice or a treatment plan or maybe even medicine - it’s going to be based on your individual bloodwork. You wouldn’t expect that to be the same as your friend or co-worker, so you have to understand that the right mortgage strategy and what those terms look like are also very individualized.”
Enticing rates could simply be part of the sales pitch, she suggested. “That lowest rate might just be to get your attention,” she said. “The lender may say ‘we can’t lock you until it’s two weeks before closing.’ What they can do is quote you any rate up front.”
In the end, homebuyers have the upper hand. For instance, homebuyers are able to find the best mortgage rate by scouring for the best options.
To avoid sticker shock down the road, Richardson said, it’s best to wait. “Don’t choose a lender at the time of contract,” she said. “That has to happen before, at the pre-approval stage.”
The best advice, she added, is priceless.
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