Will the Cost of Borrowing a 30-Year Mortgage Ever Come Back Down? Are There Better Alternatives?

The red-hot real estate market might have cooled somewhat. But with housing in relatively short supply, affordability is hard to come by. The major hurdles for buyers right now? Down payments, mortgage payments, and interest.

There are no simple hacks to work around these hurdles. But there are a few indicators worth watching closely.

Hoping to Buy, But Stuck in a Holding Pattern

The Federal Reserve’s actions to stave off an economic meltdown in the pandemic resulted in rock-bottom mortgage rates. People could finance home purchases with only 3% interest. Housing prices surged. In 2022 — then trying to curb the inflation — the Fed changed course. By early 2023, easy financing was no longer available.

The cost of a monthly mortgage payment depends on the location and type of home you buy, but U.S. mortgage payments across the board are extraordinarily high. Incomes aren’t keeping up. This means it’s harder for most people to qualify for a mortgage.

Whenever home values or mortgage rates dip, buyer competition rises. According to a May 2023 Zillow.com® article titled Will Affordable Mortgages Ever Return?, this Catch-22 situation is likely to linger a while. And that leaves many hopeful sellers and buyers in a holding pattern.

Price Activity Is Varying by Region

Zillow notes same pretty striking regional differences.

Property values are dipping in some relatively affordable cities including Chicago and Baltimore. If you’re stuck in a holding pattern, these cities could provide a landing strip. A year from now, Zillow projects, these cities could be offering attractive prices for many hopeful but currently unsuccessful buyers.

Zillow points to price projections for Los Angeles and Sacramento as getting back into “historic averages” in the coming year. Yet historic averages in these cities would certainly not count as “affordable” to the average buyer.

Prices of Salt Lake City homes have gone up nearly 40% in the past four years. Zillow says hopeful buyers shouldn’t count on the market coming down to Earth.

Have you looked into local payment assistance? While many potential buyers aren’t aware of what’s offered, some are eligible to apply for local homebuying programs.

Home Mortgage Points Help—For Those With the Upfront Cash

Buying points is harder at the beginning, But eases the monthly burden over time. For those in the position to pay more cash up front, points can tame a beastly mortgage. By paying up front for points, the buyer whittles down the interest rate. One point costs 1% of the total loan. It takes the mortgage interest down by a quarter of a percent.

By chipping away at the loan before you even start to pay it back, you’ll save money on interest over time. You might be able to save some cash at tax time by buying mortgage points, too.

Points are not as helpful, though, for those who won’t stay in the home very long, or who struggle just to come up with enough for an adequate down payment. Plus, the buyer has to anticipate all the other costs of buying: the mortgage application and origination fees, appraisal costs, insurance, and so forth, not to mention cleaning and moving expenses. The loan amount and its rate are only part of the financial story. 

Aren’t There Other Ways to Handle High Mortgage Rates?  

There are. Mortgage shoppers might want to take note of these, for just a few examples:

  • The Chase Homebuyer Grant℠ can help buyers save on closing costs. And there’s the option to receive another $500 off by taking a homebuyer education course.
  • The Rocket Mortgage Inflation Buster is a 1-0 temporary buydown that puts money in escrow in order to take 1% off the rate for the first year of mortgage payments. Applicants have to qualify for the loan with its permanent interest rate, which kicks in at year #2. A temporary buydown can work with any fixed-rate mortgage backed by the FHA or VA, or with conventional loans. The Inflation Buster can allow a buyer to save substantial amounts over year #1 of a mortgage. The lender, seller, developer, or real estate agent could fund the escrow account. Rocket Mortgage is a stand-out program because the company covers the funding.
  • CrossCountry MortgageTM will reduce the borrower’s monthly payment with its temporary mortgage rate buydown for one to three of the early years of the mortgage. While there’s no cost to the buyer, this offering, like many buydowns, has to be covered by upfront escrow funding from the seller. A portion of the lump-sum funding offsets a borrower’s monthly payment each month.
  • United Wholesale Mortgage offers one-, two-, and three-year temporary interest rate buydowns. These are seller-or lender-funded. They can, for example, reduce 2% of the mortgage rate during the first two years of the loan. UWM has recorded a podcast explaining these offerings.

Every little reduction adds up, and can help a buyer achieve massive savings over the life of a mortgage.

What About a 15-Year Term Mortgage? It’s a Trade-Off

In May 2023, we’re looking at a 30-year mortgage rate of about 7%. In comparison, the ten-year rate is about 6.3% and the 15-year fixed rate is hovering around 6% — the lowest of all. So, if you can afford and get approved for the higher monthly payments, then you can get a significantly lower rate locked in for the life of your home loan. Even a 20-year loan can save you .25% compared to what you’d pay for a 30-year fixed mortgage.

On the other hand, spreading the loan out over 30 years can be crucial for a borrower who would otherwise rack up credit card debt or lack enough cash reserves for unexpected setbacks. So, going with the 30-year loan is generally less risky, even though the interest rates are higher. And the 30-year borrower always has the option of paying extra money every month, which lowers the overall interest paid.

Sometimes, mortgage consultants don’t think to ask clients whether a shorter term could be right for them. If you think it might be right for you, ask. For most borrowers, there will be opportunities to refinance later.

Mortgage Savings Matter. Shop Around.

The down payment amount affects the mortgage rate. So does the borrower’s credit score. But research has shown that shopping around for a mortgage can influence a borrower’s rates even more.

On a related note, some mortgage specialists are more open and experienced than others. If one mortgage consultant turns a hopeful borrower down, that doesn’t mean there’s no path forward.

Time can make a difference, too. Mortgage companies are cautious in an uncertain economy, but the financial environment is a pendulum, and it does swing back.

Supporting References

Nicole Bachaud for Zillow, Inc. via Zillow.com: Will Affordable Mortgages Ever Return? (May 4, 2023; citing the Zillow Home Value Forecast; Freddie Mac’s Primary Mortgage Market Survey; Moody’s rate projections; and the American Community Survey for historical data).

Kathy Orton for the Washington Post: Shopping Around Can Help Lower Your Mortgage Rate, Report Finds (Jul. 8, 2020).

Alix Langone for CNET.com: Mortgages – Ten-Year Mortgage Rates for May (May 1, 2023).

Deeds.com: Mortgage Companies Roll Out New Deals for Inflationary Times (Oct. 26, 2022).

And as linked.

Photo credits: Andrea Piacquadio and Oleksandr Pidvalnyi, via Pexels.