It Pays (Thousands) to Shop Around When Mortgage Rates are Rising

Mortgage interest rates are rising, so it takes a keen eye and steely reserve to land a decent interest rate in today's market. Persistent shoppers might unearth deals as low as 7% or as high as 8% by competitive lenders in light of today’s current rate volatility.

The average 30-year fixed mortgage rate nudged up to 7.5% the first week of October 2023, a 23-year high according to Freddie Mac. And out on the street, negotiated rates are ranging 0.4% around that average Freddie Mac rate, which is more than double the range we experienced in the years leading up to the Fed's rate hikes. As a result, mortgage applications for 30-year fixed loans are at multi-decade lows, according to the Mortgage Bankers Association.

The benchmark 10-year Treasury bond yield, which typically drives mortgage rates, is currently around its highest in 16 years. This is in large part responsible for the aforementioned average 30-year fixed mortgage rate. And when rate volatility is high, lenders are more prone to change the rates they offer to the benefit of smart shoppers.

Lenders are employing divergent strategies in pricing their rates, in part due to the number of Fed hikes since early 2022 and to the losses many have absorbed in 2022 and 2023 stemming from reduced refinancing and sales (demand) activity. Some smaller lenders work the high side to get as much yield as possible per loan while others…perhaps the larger, stronger lenders… are keeping rates lower to increase volume.

This current scenario explains why potential home buyers with similar financial profiles and goals, but with different shopping habits, could wind up negotiating quite different mortgage rates. In short, that “average” rate released by Freddie Mac each Thursday is just that, an average…not necessarily the one a properly prepared borrower might obtain through diligent shopping.

It's highly probably that families shopping for mortgage money should do so with due diligence since, according to the Atlantic Fed:

As of July, the median American household needs 44% of its income to cover annual payments on a median-priced home...

This is the highest level recorded going back to 2006.

So, in short, there are plenty of reasons why you need to really shop quotes if you're in the market for a new house - with a new mortgage.

There are ways to reduce the cost of borrowing. Shopping around is the most effective means of spotting various opportunities. According to Freddie Mac, shoppers who received as many as five different quotes in recent months saved as much as $6,000 over the duration of their loans. It pays to shop. But remember, when taking on a mortgage obligation, you’re on the paying side rather than the receiving side of compound interest. So, do your best to reduce the interest rate as much as possible on the front end.

Here are some tips to ferreting out lower rates:

Increase your down payment. This strategy comes with its own challenges, which include finding the additional cash in your budget, and making the decision to tie up more money in a home versus another perhaps more liquid investment. Homes are often lucrative longer-term investments but very illiquid.

Purchase discount points. Discount points let the borrower pay extra money up front to lower the mortgage interest rate. Each point typically costs 1% of the loan amount and lowers the rate by about 0.25%. For example, lowering a mortgage rate just 0.25% (25 basis points) can save many thousands of dollars over the life of a loan. But remember, a homebuyer needs to keep the mortgage long enough for the monthly savings to cancel out the cost of buying down those points.

Consider an adjustable-rate mortgage (ARM). This is actually a popular option in a rising rate environment. The Mortgage Bankers Association estimates that about 8% of current mortgage applications are adjustable-rate mortgages. However, right now they are not big cost savers. According to Bankrate.com, the average current rate on the most common ARM – fixed for five years before resetting – has been only slightly lower than fixed rate mortgages.

Buy a new-build home. Because many current homeowners with low mortgage rates are staying put (which reduces the available supply of houses on the market), home builders are enjoying a strong but very competitive new home market. Accordingly, some 25% of builders are using lower rates (e.g., buying down borrowers’ mortgage rates for the first few years or even for the life of the loan) to entice buyers to purchase their product, according to the National Association of Home builders. Don’t overlook this option.

Happy shopping!