Navigating the Current Mortgage Interest Rate Environment

The home mortgage is often the biggest transaction of a person’s life. In today’s dynamic economic landscape, mortgage interest rates play a significant role in shaping individuals’ financial plans. Whether you’re a homeowner, prospective homebuyer, or even an investor, understanding the impact of the current mortgage interest rate environment is crucial to one’s overall personal financial plan.

In this blog, we’ll explore some important questions that individuals should consider when assessing how these rates influence their financial plans with key insights from financial professionals Paul Parnell, a financial advisor with Ballast Advisors, and Tom Mattaini a mortgage broker with New American Funding. Both Parnell and Mattaini have been in the financial services industry for over 20 years, and each has seen the evolution of how interest rates impact their clients.

“Mortgage rates have a direct impact on your financial well-being, influencing borrowing costs, monthly payments, and long-term savings and investing,” says Paul Parnell, a financial advisor with Ballast Advisors. “It’s important to understand how to best leverage different interest rate environments for your long-term goals.”

How have changes in mortgage interest rates impacted home affordability?

From a historical perspective, mortgage interest rates are still relatively low. But the change in rates over the last several years has certainly caused homeowners and homebuyers to re-consider what they can afford.

“Since 2008, The U.S. has seen mortgage interest rates slowly decline to historic lows. We were in the 5% range prior to Covid,“ says Mattaini. “Then we saw an initial interest rate spike and an immediate decline, where interest rates were in the mid-twos and high threes, which drove interest rates up until 2022.”

Mattaini says that after Covid crisis, the government stopped buying mortgage-backed securities, which was a factor in causing interest rates to skyrocket.

“We went from the two or three percent to sixes, sometimes in the sevens. They’re still good from a historical perspective, but it’s hard for people that have an interest rate in the threes, especially the first-time home buyers, who don’t remember the days when the interest rates were 12 or 13%,” Mattaini explains.

“Ensuring home affordability is a cornerstone of a sound financial plan,” says Paul Parnell. “As a general guideline, it is recommended that your total housing expenses, including mortgage payments, property taxes, insurance, and maintenance costs, should ideally not exceed 25-30% of your monthly income. By adhering to this prudent allocation, you can strike a balance between enjoying the comfort of homeownership and maintaining a healthy financial picture for your overall goals.”

While everyone’s situation is different, the current interest rate climate is causing a supply and demand ripple effect, especially for first-time home-buyer. It has also created a situation where cash buyers have an advantage.

“Over the weekend, I had three first-time home buyers making offers. None of them were accepted, and all of them had more than ten offers on the same house. It’s hard for that first-time home buyer to, number one, find a house that they can qualify for because the interest rates are a little bit higher. But number two, when they do find it, there are many other people that are in that same category that it, it makes it almost impossible to get the house,” explains Mattaini. “Also, while new builds just haven’t caught up since 2008, with rising costs, most new construction is in the $500,600K range, where most first-time home buyers can’t afford.”

When is the right time to buy?

When it comes to evaluating the market conditions, what should buyers consider when evaluating mortgage options in the current rate environment? Despite the current interest rates, Mattaini says that it is still a great time to buy.

“If my kids were able to buy now, I would tell them that right now is still a great time to buy. I think there are a lot of people that are sitting in the background waiting for interest rates to come down, but when interest rates come down (and we’re confident that that is going to happen). That is going to create more demand, and then the housing prices are going to go up,” he says. “You’re better off buying now when at a lower price with a higher interest rate. If, and when, interest rates do come down, you can always refi down the road. But for you to wait for interest rates to come down because you think it’s going to cost you less, that is not likely. It’s only happened one time in 40 years, and I don’t think it’s likely we see that again.”

“Your home loan is not just a standalone financial obligation but an integral part of your bigger financial plan. By considering your mortgage within the context of your broader financial goals, you can ensure that it aligns with your overall wealth-building strategies,” adds Parnell.

How does the rate environment impact refinancing decisions?

You may be thinking, when does it make sense to refinance your mortgage? Or how can a change in interest rates affect the decision to refinance?

“By closely monitoring mortgage rates, buyers can seize opportunities to lock in favorable rates, optimize their mortgage strategy, and potentially save thousands of dollars over the life of their loan. Even a slight rate difference can significantly impact your overall financial plan,” explains Parnell.

When might it be advisable to consider refinancing or modifying an existing mortgage in the current environment? Why would someone take a 3% interest rate and refi it to a 6% interest rate? Mattaini says that depends. “Almost all of my refinance business right now is somebody that’s doing a cash-out refi to either pay off debt, pay down revolving debt that could be in 15, 20% interest rates,” he says. “Or they’re using those funds to remodel their house.”

“We could go out and secure just a second mortgage, and they can leave their first mortgage where it is. If they need less money, I tell them to get a second mortgage. Typically, second mortgages are not good long-term financing solutions because they are at a higher interest rate. If they need more money, we look at combining their first, doing a cash-out refi so they can use those proceeds.”

There are also important considerations of closing costs.

Mattaini and Parnell agree that taking time to do the financial analysis is crucial to determine what’s going to be the best for that individual homebuyer.

How do mortgage rates environment influence overall investment decisions?

Fluctuations in mortgage rates can have a ripple effect across various investment sectors, impacting real estate investments, portfolio diversification, and borrowing costs for leveraging investment opportunities.

“We have always been told our whole lives the cheapest house that you’re going ever own is the one that you pay off the quickest. I don’t think that’s the case anymore. Why would you apply extra money to an interest rate that’s in the 3% range? Especially if you’re carrying any debt, your money could be going to pay off your debt and invest in something that will give you a better return than 3.5% or 4%,” says Mattaini.

Indeed, different rate environments can impact a family’s investment strategies in unique ways.

“In a low-interest-rate environment like today, where mortgage rates are at historic lows, investing cash into a well-diversified portfolio has the potential to provide a better rate of return than using it to pay down your loan principal. By strategically allocating your funds across different asset classes, you can leverage the power of compounding, take advantage of market opportunities, and potentially generate higher long-term returns that outweigh the benefits of early mortgage repayment,” says Parnell.

Working with your financial professionals

Whether you’re a first-time homebuyer or a homeowner considering adjusting your existing mortgages, it’s important to find trusted financial professionals who can help you look at the bigger picture and understand risks or potential downsides, and to help you take steps and find strategies to optimize your financial plan in anticipation of rate changes.

“I make sure that it is 100% in that customer’s best interest to go through that process, and they understand why they’re doing it, and they’re going to hopefully make the smart decision,”  says Mattaini, who recommends maintaining a good relationship with your lender.

“Don’t underestimate the power of even a slight rate difference, as it can significantly impact your overall financial plan. Stay informed, be proactive, and leverage the potential benefits that favorable mortgage rates can offer,” Parnell adds.

Conclusion

The current mortgage interest rate environment has far-reaching implications for individuals’ financial plans. By answering these key questions and staying informed about prevailing rates, borrowers and investors can make well-informed decisions to optimize their financial goals. Remember, consulting with a trusted financial planner can provide personalized guidance tailored to your unique circumstances. Stay updated, be proactive, and adapt your financial plan to navigate the ever-changing mortgage interest rate landscape.

Disclosure:

The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results. Nothing contained herein is an offer to purchase or sell any product. This material is for informational purposes only and should not be considered investment advice. Ballast Advisors reserve the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.