What does the market mean today for first-time home buyers

As we write this, mortgage interest rates have fallen slightly. According to Freddie Mac’s Preliminary Mortgage Market Survey, a 30-year fixed-rate mortgage averaged 5.25 percent for the week ending May 19, with an average of 0.9 points. (The point is 1% of the loan amount). The average 15-year flat-rate mortgage was 4.43% with an average of 0.9 points, and the five-year ARM averaged 4.08% with an average of 0.2 points.

Here’s something most first-time buyers don’t realize: If you have a lower credit score, the interest rate on your loan will be higher. For someone with a credit score of 700 to 719 with at least 20 percent, the average 30-year fixed-rate mortgage rate on May 19 was 5.833 percent, according to Bankrate. For someone with a credit score of 660 to 679, the average interest rate was 6.66%. But for people with credit scores of 800 or higher, they may be able to secure an interest rate of about 5.5 percent.

These numbers differ slightly from the Freddie Mac survey, because this survey also quotes the average number of points paid to lock in these interest rates. The more points the borrower pays, the lower the interest rate. Bankrate numbers do not indicate interest rates in pips, so average rates appear higher.

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You may also want to compare rates in your area for bulk loans versus conventional loans before choosing a loan product. In some markets, the interest rate on one type of loan may be lower than on another. (A jumbo loan, in many markets, is a loan of at least $647,200 for a single-family home. It can go as high as $970.800 in high-cost areas.)

Some lenders offer better interest rates for loans with a lower loan-to-value ratio. They also charge a higher interest rate on loans under 20 percent equity, so it pays to shop around and ask as many questions as possible to get the best mortgage program for the home you buy.

This difference is why it is important to ask potential lenders about interest rates, points, fees, special loan programs, and any other costs associated with your loan approval.

Although interest rates jumped faster than most economists expected, home prices also rose, adding to the financial pressure first-time buyers are feeling.

According to the Federal Reserve Bank of St. Louis, the median sales price of homes sold in the United States was $428,700 in the first quarter of 2022, up from $369,800 a year earlier. That’s a 15.9 percent jump.

And although the rise in home prices has slowed somewhat from the sharp pace at the end of 2021, home values ​​have been growing at a healthy pace since the end of the Great Recession.

Some of our readers wondered if higher interest rates would cause home values ​​to fall, as they did in 2008 and 2009. In those years, average home prices fell by just over 10 percent per year. (Home prices in some locations have fallen more than others.)

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Unfortunately, for first-time buyers struggling to find any home to buy, Lawrence Yun, chief economist at the National Association of Realtors, doesn’t think we’ll see home prices fall. why? Because demand far outstripped supply, the quality of borrowers remained high.

“The underwriting criteria are very strict throughout the process, and it is unlikely that there will be any massive forced sales. Also, inventory levels are at historic lows. Even with lower demand, this means a change from 20 multiple offerings to one or two offerings yet,” Yoon said. 30 days in the market, noting that this level of competition is “normal and consistent with house prices rising 5 percent or so. . “

But he also acknowledges that if the Fed raises interest rates, even more aggressively than the seven planned increases, some housing markets may see some small price drops; However, he believes buyers will jump in for a “second chance” to be a homeowner.

“In places like Phoenix, where home prices have gone up more than 30 percent in one year, a 5 percent or 10 percent price drop, if it occurs, will not lead to financial stress. Just like a 30 percent rise in a stock price Then some give up [of the gain] “It doesn’t cause any financial stress,” Yoon said. “Only persistently large drops in prices will be a problem, as happened during the period from 2008 to 2012 with the mortgage collapse and the foreclosure crisis.”

Of course, if you stretch out to buy a home, only to watch its value decline while you’re there, you’ll be upset. Instead, try to view your home as a long-term purchase. It is the place where you will live, take root and enjoy your life.

Hopefully, by the time you’re ready to sell, the value of your home will at least keep up with inflation.

Ellis Glink, author of100 questions every first-time homebuyer should ask(4th ed.). She is also the CEO of Best Money Moves, an application provided by employers to employees to measure and mitigate financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Connect with them through her website, bestmoneymoves.com.