Homebuyers Coping With Higher Mortgage Rates in Various Ways
Written By: Joel Palmer, Op-Ed Writer
Potential homebuyers are finding various ways of dealing with the new reality of higher mortgage rates that are closer to historic norms.
During the recent pandemic, mortgage rates sank below 3 percent. In January 2021, the average 30-year rate hit an all-time low of 2.65, according to Freddie Mac. By October 2023, however, that rate was nearly at 8 percent.
One ways homebuyers have combatted this trend is buying discount points, according to analysis from the Consumer Financial Protection Bureau (CFPB).
In the report, titled Trends in Discount Points Amid Rising Interest Rates, the bureau found that the percentage of homebuyers paying discount points roughly doubled from 2021 to 2023.
The increase was even greater among borrowers with lower credit scores. Nearly 77 percent of FHA borrowers with credit scores below 640 purchased discount points, while 65 percent of all FHA borrowers paid discount points.
“The heavy use of 'discount points' suggests that many borrowers are uncertain about their ability to refinance in the future,” said CFPB Director Rohit Chopra.
The report used quarterly Home Mortgage Disclosure Act (HMDA) data from 2019 through the first three quarters of 2023. During this period:
Discount points were most common among borrowers with cash-out refinances, with 87 percent of those borrowers in September 2023 paying discount points, up from 61 percent in January 2021.
Nearly 61 percent of borrowers with home purchase loans and 58 percent of borrowers with non-cash-out refinance loans also paid discount points in September 2023, up from 31 and 36 percent in 2021, respectively.
Borrowers with cash-out refinances also paid a greater number of discount points. The median amount of discount points in the 2023 quarterly data was 2.1 points for cash-out refinance loans, 1.1 points for non-cash-out refinances, and 1.0 point for home purchase loans.
CFPB said that while discount points may provide advantages to some borrowers, the financial tradeoffs are complex and that they will monitor the trend for potential consumer risks.
Meanwhile, Fannie Mae researchers opine that homebuyers may simply “be adjusting to higher mortgage rates.”
In the latest Home Price Sentiment Index, survey respondents indicated a slightly increasing optimism about both buying and selling homes. But they also seemed resigned to the reality that higher mortgage rates are here to stay.
“Both our ‘good time to buy’ and ‘good time to sell’ measures continued their slow upward drift this month,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.
“However, consumers took a slightly more pessimistic view on the likely direction of mortgage rates, likely reflecting the fact that actual mortgage rates have moved upward since the start of the year. With the historically low rates of the pandemic era now firmly behind us, some households appear to be moving past the hurdle of last year’s sharp jump in rates, an adjustment that we think could help further thaw the housing market.”
In the meantime, Generation X homeowners are already planning ahead for retirement by buying what they perceive to be their final homes to age in place, according to a recent New York Times report.
This generation, typically defined as those born between 1965 and 1980, are several years away from retirement. The report claims, however, that many in that age group are already starting to think about where they will live in their 70s, 80s and even 90s.
Rather than waiting for mortgage rates and/or home prices to moderate, Generation X is scooping up their desired retirement homes now.
One of the reasons cited in the article for this early planning is the concern that home prices will continue to soar while mortgage rates will remain at or near current levels.
This generation is in a better position overall to buy new and existing homes in the current environment than older and younger generations due to:
A median income of $126,900, which puts them among the highest-earning buyers, according to the National Association of Realtors.
58 percent of homebuyers in this age group being married couples, providing dual incomes.
A significant amount of equity in their existing homes to use toward the purchase of a new home. Gen-X has a homeownership rate of 72 percent, according to Redfin, compared with 55 percent for the Millennial generation.
Being at an age where they are becoming empty nesters, reaching their highest income potential, and knowing it’s highly possible they can live another 30 years or more.
“If they are shopping for homes, given the tightness of the market and remote work, I do believe you see more Gen X-ers seeing a home purchase as a home for the rest of their lives,” said Cristian deRitis, deputy chief economist at Moody’s Analytics, to the Times.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
