When it comes to financing a home in the current real estate market, the interest rate on a loan is of chief concern for buyers. That has resulted in a growing interest in rate locks from buyers, sellers, builders and lenders.

In fact, rate locks as a negotiation technique have bubbled up to the surface as another tactic for lenders looking to secure loans in the current economy.

In Part 2 of this episode, host Maiclaire Bolton Smith continues the conversation 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:

• 1:31 – By how much can an extra payment lower the total cost of a mortgage?
• 5:55 – Are people starting to come back to the market, or are they still locked into their homes due to mortgage rates?
• 7:27 – Are first-time homebuyers the ones who will begin to break the cycle?
• 9:36 – Erika Stanley gives us insight into what is happening globally with natural disasters.
• 11:00 – What is the forecast for mortgage interest rates? How will inflation affect that?

Links: 2023 Hurricane Risk Report

Up Next: Are Rate Locks the Negotiation Key for Lenders to Secure Loans in this Economy?

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

Molly Boesel:

80% of owners have a mortgage rate under 4%.

Maiclaire Bolton Smith:

Wow.

MB:

Yes, yeah.

MBS:

Wow.

MB:

So they don't have a big incentive to give up that rate.

Erika Stanley:

Welcome back to part two of our miniseries about rate locks, the lock-in effect, and the current state of the property market. If you missed Part One, I do recommend going back and catching up on last week's episode.

To recap, we welcome back economist Molly Boesel, and talked about rate locks, how important interest rates are to the price of the home, and why there are so many options to obtain one currently. Let's jump into it.

MB:

You are the buyer, and you don't think that 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.

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 make one extra payment.

MBS:

Paying a little bit more on the principal and the impact that can make.

MB:

Just a little more of the principal because that's what people don't realize. I didn't realize this until I had a mortgage is that any extra payment goes straight to the principal. That really lowers your overall cost of borrowing.

ES:

So how much can an extra payment lower a mortgage? Let's find out.

Assuming no taxes and insurance for this 30-year, fixed rate loan calculation, if you bought a home for $500,000 at 5% interest and you put 20% down, you would be paying the bank $373,023 in interest over the life of the loan. If you paid just $100 per month extra, you would save $41,557 in interest payments. Make that extra payment $500 per month, and you would save $140,740. That's a huge difference.

MBS:

I'm glad you mentioned that. So a couple of things there. One, I'd actually forgotten that. We worked with a mortgage broker, who was my hero through all of this. She was wonderful and just such a great partner through the drama that we went through. But that was something she said when we first personally were buying down the interest rate on the first home. Because at the time, it wasn't very much money, she calculated that our break-even point was, I think, five years — four or five years. So she's like, "It's definitely in your best interest to do this." Yeah, she said, "Even if you refi, you probably won't see interest rates come down that much in a couple of years. It'll probably be beyond that." So she's like, "You definitely are going to want to refi at some point." But for the limited amount of money that it was, and the break-even point being just a couple of years, it was in our best interest to do so.

But with something like the vast amount of money that it was to buy down for the one that we did when we purchased this home, I don't know what the break-even point would be. I didn't calculate it because I wasn't paying it, but I was benefiting from it. But I think that's a really important point that if you are paying $20,000 or $30,000 to buy down a rate, is it actually in your best interest knowing that you can refi at some point?

MB:

Right, exactly.

MBS:

Yeah. The other point that you touched on was this concept of making an additional payment. I think that's something that people don't necessarily think of. I know our mortgage, I'm sure other mortgage sites are like this, it actually let you go in and calculate how much sooner can I pay off my loan and what do I need to do by it? And that if you made two payments ... When you make a mortgage payment, I'm going to say, such a small fraction of it goes to the principal. So much of it is going to interest. And that changes over time. It's not a linear curve, but the more you pay off, the less interest you're paying. Ultimately, you're making bigger payments on the principal in time. But if you made a second payment or just a little bit more on your payment, every bit of that money goes to the principal. That's something that I think people don't necessarily think of.

MB:

That's something that's unique to mortgages. On a car loan-

MBS:

Car payment.

MB:

... you wouldn't have that. Yeah, that's more of an installment payment or an installment plan. You don't get that. There's actually for car payments, I think some of them have a penalty for paying it off early. So there's really no point on that. Well, okay, I shouldn't say no point, but it's a different calculation.

MBS:

Yeah, just a different concept and something that's really interesting with how mortgages work.

MB:

Right.

MBS:

Okay. I want to change topics just a tiny little bit to something that's related, but a little bit different. Previously when you were on this podcast, we talked about the lock-in rates. We were talking about rate locks and lock-in.

ES:

So what is the difference between a rate lock and the lock-in effect? A rate lock is an agreement between a buyer and a bank for the interest rate on a mortgage loan. Locking a rate ensures that the interest rate won't change between the offer and closing. There are caveats to this agreement, such as the requirement to close within a specified timeframe and maintain an application with no changes.

The lock-in effect is when a homeowner chooses to stay in their home when they otherwise might have moved due to external factors such as interest rates. These external pressures can make a homeowner feel locked into their house since moving and taking out another mortgage could raise housing costs significantly.

MBS:

There are a lot of people that have a locked-in, really low interest rate because they refied in this last refi boom. Are we starting to see more people come back on the market and want to purchase a new home? Are people like me just crazy to think they want to do this? We left a 2.5% or 2.75% interest rate, and now it's almost more than double that. But are we-

MB:

You're a really good example of somebody coming back to the market, right?

MBS:

Yeah, yeah. We did it because we needed a bigger home. We just had outgrown our home. We had a child during the pandemic. We both started working at home during the pandemic, and there just wasn't space for us in our little house. Yeah, so that was something that was really important to us is we were like, "We just need to eat it and get into a bigger home." Are more people like us becoming more common, or are we still a rarity?

MB:

Almost all homeowners ... In fact, I'm going to throw some numbers out at you, Maiclaire. So get ready, everybody. We have 97% of current owners with a mortgage have an interest rate under 6%.

MBS:

Wow.

MB:

That's 97%. All right?

MBS:

Wow, okay.

MB:

Mortgage rates are close to 7% right now. And another number: 80% of owners have a mortgage rate under 4%.

MBS:

Wow.

MB:

Yes, yeah.

MBS:

Wow.

MB:

They don't have a big incentive to give up that rate because they're going to see a huge jump in their monthly housing costs. You talk about why would you want to give that up because housing is one of those unique kind of goods. Okay, if you're a buyer and you're a first-time buyer, it's not a big deal. You don't have to sell a house. You don't have a mortgage already. You don't have to sell a house.

MBS:

You don't have anything to compare it to.

MB:

Right, you have nothing to compare it to. You have nothing to give up. But a buyer like you, you had to sell your current house and give up your rate. So that's very unique. You don't go to the store to buy milk and then have to sell some milk to get some milk. You know what I mean? It's difficult.

MBS:

It's true.

MB:

It's a different type of market. That's what you're talking about, owners being locked in. You're a good example. You wanted to move to a bigger house. There's some people who want to move location. That's another good example. Maybe somebody's downsizing, they want to get a smaller house.

Like I said, we have first-time buyers. They're probably renters. I told you, I like to look at rents. House prices have been going up at historically high levels and so have rents. If you're a renter and you want to buy, you might tolerate this higher rate for a little while. You might get an ARM, or an adjustable-rate mortgage. You might refi later. But going from renting to buying is a really great way to control monthly housing costs.

MBS:

Good point. Good point.

MB:

MBS:

Sure, yeah.

ES:

Let's take a break and talk about what's happening in the world of natural disasters this season. Summer is here and along with warmer temperatures, there have been a few notable developments in North America. Wildfires in Canada have become "out of control" according to the Canadian Interagency Forest Fire Centre. These fires have spread rapidly, burning millions of hectares and leading to poor air quality up and down the East Coast.

To find out more about hurricane risk this season, download the 2023 Hurricane Risk Report from the show notes. That's the Natural Disaster Digest.

I think this is a good place for us to end today. You talked a little bit about where interest rates may go. So that's my question. What does your crystal ball say? Is there a forecast for interest rates? How soon am I going to be refi-ing my house?

MB:

MBS:

Okay. But depending on the cost of your home, even not depending on the cost of your home, 1.5% or 2% can make a big difference.

MB:

They will come down eventually and especially as inflation drops. So when you see inflation starting to drop from the levels ... If inflation's down ... gets down around 4%, 3%, I think that's when you're going to see mortgage rates really drop back down to the 5%, maybe under, level.

MBS:

Okay. That's a really good metric to follow too, because I think more people keep an eye on inflation than they do on mortgage rates if they're not in-

MB:

Oh, certainly. Certainly.

MBS:

Yeah. If they're not in the place of they're looking to buy a home, they probably don't really keep an eye on it, but everybody does keep an eye on inflation. So good to know that that's something that's related.

MB:

Definitely.

MBS:

Yeah. Well, Molly, it's always so great chatting with you, and thanks for listening to my drama that I went through in purchasing my home.

MB:

I was really happy to hear your update and that it worked out for you.

MBS:

Thank you so much. Yeah, and it feels great to have a home that we love now.

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.

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.