Anyone who is buying a home with a mortgage almost certainly talks to their lender about interest rates. With real estate market trends defined by some of the highest interest rates in decades and annual home price growth reaching its lowest level in more than a decade, purchasing a property is an undertaking that requires buyers to look at the data and do the math.

The current environment is also opening up rate locks to become a negotiation tactic — a technique that falls in and out of favor with real estate trends. 

In this episode, host Maiclaire Bolton Smith sits down with CoreLogic Principal Economist Molly Boesel to discuss what rate locks are, why they are trending in the housing market and what that may mean for lenders looking to retain or gain new business.

In This Episode:

• 3:19 – What are rate locks and why are they trending?
• 6:24 – Mortgage rate locks come at a price. Does that make them a valuable negotiation tactic?
• 10:11 – Erika Stanley goes over the numbers in the housing market.
• 11:31 – Maiclaire talks about using rate locks as a negotiation tactic when buying her home.
• 13:09 – Are mortgage rate buydowns also becoming more common in this market?
• 16:30 – Are mortgage rate buydowns and rate locks the only tactics available to reduce monthly mortgage payments?

Links: CoreLogic’s monthly Home Price Index (HPI) 

Up Next: Has the Economy Locked in US Housing Market Price Stagnation?

Find full episodes with all our guests in our podcast archive here: https://clgx.co/3zqhBZt

Molly Boesel:

...The borrower's not the only one who can pay for a buydown, though. The borrower can pay for a buydown, the seller can pay for a buydown if they're really motivated. And more recently, we've had builders paying for buydowns...

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast where we tour the property market to investigate how economics, climate change, governmental policies, and technology affect everyday life. I am your host Maiclaire Bolton Smith. And I'm just as curious as you are about everything that happens in our industry. Although it's not breaking news anymore, mortgage rates are high, and this has made mortgages more expensive, both for first-time home buyers as well as people looking to move. Trust me, I know. I was one of them. The result is everyone is looking to secure the lowest mortgage rate possible. The problem is current homeowners are unwilling to give up the low interest rates that they've locked in and are sometimes deferring, listing, and limiting inventory.

This can create a competitive and sometimes unaffordable market for buyers who are willing to take the plunge. Despite these pockets of competition that remain, homes are still being bought and sold. However, as the market changes and as mortgage rates remain a point of concern for buyers, it's become very important to lock in the optimal rate for the decades it takes to pay off a mortgage.

So, to talk about rate locks and the effect they're having on the housing market, we are welcoming back one of my favorite guests, CoreLogic, principal economist, Molly Boesel. So Molly, welcome back to Core Conversations.

MB:

Yeah, thanks a lot for having me back. I'm really excited about this one.

MBS:

I am too because the last time you and I talked, my life felt apart. So we're going to talk a little bit about that, about what was going on off-air at the same time, and this is all really relevant to that. So, I just thought it would be really interesting to have this conversation because of what we went through. So, why don't you quickly just tell our listeners a little bit about who you are. You are a regular guest, but just a quick reminder.

MB:

Sure. So I'm a principal economist in the Office of the Chief Economist. I follow the housing and mortgage markets, how these trends affect basically CoreLogic business. And I have a specific interest in home prices and also single-family rents and what's been happening with those the last few years.

MBS:

And there's been some exciting stuff happening. Exciting, interesting, volatile things happening with all of that in the last couple of years. Historic, yes. So today we're going to talk about rate locks, and I actually didn't really quite understand this concept before I just went through this, but can you talk a little bit about what is a rate lock and how common they are to use.

Erika Stanley:

Before we learn about rate locks and why they're trending, I wanted to remind our listeners that we want to help you keep pace with the property market. To make it easy, we curate the latest insight and analysis for you on our social media where you can find us using the handle @CoreLogic on Facebook and LinkedIn or @CoreLogicInc on Twitter and Instagram. But now let's get back to Maiclaire and Molly.

MB:

So when you look at rates on the web or you talk to a lender about mortgage rates, those are really the rates that are only available at that moment. So those quoted terms are available then, they're unavailable weeks or even months later when you find your home and you go to settle your home. So a rate lock is the commitment the lender is willing to make to hold a certain rate available for you. And that's usually for a specific amount of time. So while you're searching for your home, you're waiting for your loan application to be processed, and then when you're waiting for closing.

MBS:

Okay, so story time friends. So something that we went through, I'd mentioned before that we sold our house in a matter of minutes really, like it was in under 24 hours that our home sold. We were in contract to purchase a house that was contingent both on us selling our home and the buyers purchasing a new home. And the contract had a fixed amount of days for both of those things to happen. So when we went into contract, we locked in a mortgage rate and we'd locked it in for 30 days.

And that should have been enough time for us to close on the property, given the way the contract was written. Spoiler alert, it wasn't.

So what ended up happening was the home we were buying, they had a lot of trouble finding a home for obvious reasons — inventory is super low — and they extended the contract. And with that we did a rate lock extension. So we had the opportunity to continue to lock in the rate that we had because by this point, this was January, February, and by that point, that's really when mortgage rates were just really going up. So we had gone up from 5.9% to 7% at some point, and it was going to cost a lot more if we couldn't continue to lock in the rate. So there was the opportunity to extend the rate lock. So can you talk a little bit about how that works?

MB:

Yeah, so like you said, the rate lock is good for a certain amount of time. So if something happens, like in your case where there was some contingencies that didn't come through, your rate lock expired. So what happens then? You either have the opportunity to pay the higher rate as in your case, or you can get an extension. Unfortunately, a lot of times I think, I don't know about your case, but an extension, most likely you'd have to pay a fee for that.

Erika Stanley:

Getting a favorable interest rate is definitely desirable. However, it is only part of the process of finding and buying a home. A large part of the process is knowing where to buy and when to do it. CoreLogic economists track these metrics in the monthly Home Price Index, which you can find at the link in our show notes.

MBS:

And it's a very big fee. So that's the other thing we learned was there was the opportunity to extend and you could extend it three times. But each time you extend it, it was twice as much as it was the first time. So it could get very pricey.

We did do some negotiating and have the sellers, or even the agents were offering to pay the extension to keep this deal going because they thought we would walk away from it if we couldn't get the interest rate that we had locked in. So rate lock extension was something that we did do as well. The other part of it, and the next thing I wanted to talk about is, so when we first got that rate, we bought it down, which was another concept I didn't understand that much about, is buying down the rate.

So at the time, because the rates were not super high, I think we paid $800 or $900, maybe a $1,000, to buy down the rate, which would be part of our closing costs. But we then looked at, okay, would it be worth extending the lock or reapplying for a new loan and buying it down, and at that point it was something like $25,000 or $30,000 to buy down the rate. So because rates had gone up so much, this whole buying down the rate became very expensive. So that's why it became even more important to lock in the rate and do the rate lock extension.

MB:

That's right. So buydowns, they're definitely a way to lower the mortgage rate. And like you said, you opted to pay some points upfront that you would pay a closing to get a lower rate. The borrower's not the only one who can pay for a buydown, though. The borrower can pay for a buydown. The seller can pay for a buydown if they're really motivated. And more recently, we've had builders paying for buydowns. Buydowns have always been there, but they kind of ebb and flow with popularity.

MBS:

Oh, that's interesting. So, story continues. That deal, which we were in contract for 90 days, a little over three months, it actually fell apart on close day. We thought we were getting the house, we thought everything was coming together, and the sellers backed out on us on close day. So we were then left with no home, living in an Airbnb, and desperately needing a house. To which we did find one later, even that same day, thankfully.

But my big concern was mortgage rates were so much higher at this point, and it was going to be $30,000 to buy down the interest rate that we had on the first home. So this was now making our purchase exponentially more expensive. But to what you just said, it doesn't need to be the homeowners that pay this. And that was something we had a very motivated seller on the home that we ended up buying, and they offered to pay the buydown for us. And I had a friend that was selling her home at the same time, and the sellers asked them to buy down the interest rate as well too. So I think maybe because interest rates were so much higher right now, did this concept become a lot more popular that people were using this as a negotiation tactic, I guess?

Erika Stanley:

Speaking of getting the best deal possible when buying a home, it's that time again, grab a cup of coffee or your favorite beverage, we're going to do the numbers in the housing market. Here's what you need to know.

Homeowners with mortgages represent about 63% of all properties according to the 2016 American Community Survey. That makes up about two-thirds of Americans who saw their equity decrease by a total of $108.4 billion since the first quarter of 2022. That's a loss of 0.7% year over year.

MB:

Yeah, so it could be also where you were looking. If a seller realizes that this deal might fall through and then they need to look for a new buyer, but in the meantime maybe prices will fall in a little bit or something. It's like that, they could be pretty motivated for that. And when you have the seller offering to pay for the buydown, it becomes a much easier decision for you as the buyer, and especially if they're not raising the price because sometimes a seller will just compensate for with a higher price.

MBS:

And that actually is interesting, because that is kind of what they did. So our agent went to their agent and said, "What are they looking for, for an offer?" And it was because the home had been on the market for a little bit, and it had dropped in price just because of the way the market was at this particular price point. And they actually said they wanted X dollars, or if we were willing to go a little higher, they would buy down the interest rate. So then we did the math on what would the monthly payment be for a higher price point, but a lower interest rate. And it worked out exactly the same. The difference was more at closing, which we weren't really paying, they were paying, because they were buying down. We had a little bit more in terms of the down payment, but not that much. But it was a very interesting negotiation tactic that I didn't even know existed.

MB:

Yeah. No, that is great.

MBS:

Yeah, so it really did work. I guess, is this something we're starting to see more commonly? And you even mentioned builders. How does that work for a builder to buy down the interest rate too?

MB:

Oh yeah. So I think a lot of lenders offer buydowns. They're not really taken up by that many borrowers. Kind of a small share of borrowers. It is increasing in popularity. There's a lot of reasons why it wouldn't be taken up by a lot of borrowers. Like you said, you got to do that math, you have to figure out if you might want to refinance. You got to figure out, you might want to watch interest rates. Where are they going? Rates are going to go down in the next year. If they are, you might want to just refinance the loan next year. There's also always the possibility of an adjustable-rate mortgage.

MBS:

Oh, interesting.

MB:

So if you also think rates are going to fall when you have your adjustment period. The next 1, 2, 3, even 5 years or longer on those adjustable rate mortgages, then you could just refinance then. So, while a lot of lenders are offering them, it's just a small share, but an increasing share of borrowers are taking them up.

MBS:

That's really interesting. So specifically when you talked about how builders may offer this, is this kind of tied to our inventory again, and are we seeing that more with new construction, or is that related at all?

MB:

So builders, they had a hard time completing new projects during COVID, the worst parts of COVID. And they had a lot of inventory just came on the market right after the supply chain issues alleviated a bit. So builders are offering buydowns for buyers, and about three-quarters of builders are offering them. And it is a way to get the buyer into that new construction. And they're doing it a couple of different ways. You were talking about a buydown, I don't know if yours was for the entire length of the mortgage or if it was just for a year or two.

MBS:

It was, yeah.

MB:

Because it could be one where you buy it down for one year or two years.

MBS:

Oh, interesting. Only with an adjustable rate? Would it have to be an adjustable rate?

MB:

No, that would be with a fixed rate. A fixed rate.

MBS:

Oh, interesting.

MB:

You buy down the rate, it's called a... There's a 2-1 buydown, 3-2-1 buydown.

MBS:

Oh, interesting.

MB:

So some builders are offering the just short-period-of-time- buydown, or some are offering them for the full length of the loan. There are all flavors of buydowns out there.

MBS:

I didn't realize that. I bet they all are very different amounts of money too to do.

MB:

Yes, I think so. Yeah, I think it's just, like I said, a lot of different flavors. And that's where you said you were doing that calculation, and that's really what a borrower has to do. If you're going to pay up the... First of all, you got to come up with the money. So if you don't have the down payment, that would be an issue. But if a borrower wants to buy down the rate and they have the down payment, then they need to calculate the breakeven point.

So the breakeven point's the amount of time it takes to recoup that cost of those points you pay at closing. If you are the buyer and you don't think you're going to stay in the home for that amount of time, or you think there's a chance you're going to refinance before that amount of time, that buydown's not worth it. There are things a borrower can do to lower their overall cost of borrowing. And one, I think a lot of people don't think about, I know we're talking about rates, but I think a lot of people don't think about this, is just making an extra payment. Not even every month, but maybe every year.

MBS:

Yeah, paying a little bit more on the principal and the impact that can make.

MB:

Erika Stanley:

Obviously, if you've already bought a home, you know what a whirlwind it can be. But to learn more about the difference between rate locks and the lock-in effect, as well as hear more about the economic standing of the property market, tune in for Part Two of this conversation with Maiclaire and Molly. As always, we'll pick back up next week. See you there.

MBS:

All right. And thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released.

And thanks to the team for helping bring this podcast to life. Producer, Jessi Devenyns; editor and sound engineer Romie Aromin; our facts guru, Erika Stanley; and social media duo, Sarah Buck and Makaila Brooks. Tune in next time for another Core Conversation.