Kristin Tassi spent last weekend happily settling into her new home in the Chicago area, but part of her brain was still obsessing over the mortgage rate she got for it.
“I don’t think we’ll ever not think about it,” said the 33-year-old public relations professional.
After watching friends who had bought houses over the past few years snag historically low rates, Tassi and her husband were shocked to find themselves looking at rates above 4 percent when they started house hunting in earnest in January.
They found a house they liked, but then it fell through. A few weeks later, when they were running the numbers on another prospective home, rate increases had already pushed up the payments by $100 a month.
They ended up having to pay points for a 4 percent rate, which raised their closing costs because they were paying a fee of several thousand dollars to lower the rate on their loan.
“It caused me so much anxiety,” Tassi said.
Mortgage shoppers and refinancers have been so accustomed to good news since rates started to slide below 4 percent in 2011 that the run-up in the past few months has been shocking.
While most housing-market experts do not expect rates to affect home affordability yet, the refinance market has already significantly declined; the total number dropped 29 percent in 2017 from the prior year, according to Black Knight’s Mortgage Monitor Report.
Todd Jones, president of BBMC Mortgage, which is headquartered in Chicago, is training his brokers all over the country how to deliver bad news.
Chief among his lessons is showing empathy to clients. While $100 a month might not sound like too much, it might adjust a client’s debt-to-loan ratio, which could push the size of a house they can afford down by $40,000 or $50,000.
“It’s not just a number to them, it’s looking at paying more for the house of their dreams,” Jones said.
Buyers may tap brakes
At some point, rates could go up so much that people stop buying.
Jones said he is already starting to see a pause in the market as rates approach 5 percent.
A survey from Redfin in February found 6 percent of home buyers would cancel plans to buy if mortgage rates went above 5 percent, while 42 percent would start to hurry up.
While rates could be at that level later in 2018 or 2019, Zillow senior economist Skylar Olsen does not expect rates to cross above 6 percent until 2020. The good news is that Olsen does not expect rates to climb past that level, and certainly not just to keep ascending endlessly.
But the chance to go below 4 percent again? “Not any time soon,” Olsen said.
Alternatives are few
Workarounds are few, since rates tend not to fluctuate too much between different companies. But shopping is always a good idea. Tassi went to three different mortgage brokers in her journey, and ended up working directly with the bank where she keeps most of her accounts.
George Burkley, a mortgage broker in northern Indiana, said he has been searching more aggressively for government-backed loans for his clients, especially VA loans, where rates may be lower and down payment requirements less strict.
Jones said he has also been loosening up credit score minimums on some of these loans, down to 580 for VA loans, in particular.
The best thing for clients to do is shore up their finances and get educated on today’s rates. Jones says much of what people see is outdated, since blog posts and advertisements do not just go away after a few weeks.
Another recalibration that buyers need to do pertains to their expectations of how much house they can afford.
Nathan Pierce, a mortgage broker in the Salt Lake City area, has seen people who prequalified at one level have to go through the process again when rates go up.
One couple found a home at the top-end of their range and by the time they tried to lock a rate, the monthly payment had jumped several hundred dollars. The bank balked. They got their earnest money back, and went out looking again.
“The problem was, the prices on the homes they were looking at went up $10,000 in the meantime,” Pierce said. “It was very stressful for them.”
Beth Pinsker writes for Reuters.