It didn’t take long for the Federal Reserve’s 0.75-percentage-point rate hike to shake the housing market.
The Fed’s move to boost the benchmark Fed Funds rate, announced on June 15, was followed by a significant rise in mortgage rates the very next day. On June 16, the benchmark 30-yard fixed-rate mortgage rose to 5.78% from 5.23%. Consider that the same rate stood at 2.93% in June 2021.
"These higher rates are the result of a shift in expectations about inflation and the course of monetary policy," said Sam Khater, Freddie Mac's chief economist. "Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market."
How U.S. Homebuyers Can Fight Back Against Higher Rates
On the downside, there’s really not much American homebuyers can do to stem the tide of higher mortgage rates -- not when the Fed is in an inflation-fighting mood and with more interest rate hikes on the way in 2022.
The good news? Mortgage consumers can take at least one action step to save money on a home mortgage, even in a high-rate environment – shop around for the best mortgage possible.
The data support that strategy.
According to a new study from Lending Tree, U.S. homebuyers who shop around for the lowest mortgage rate possible can save $63,000 over the course of the entire home loan.
That calculation is based on a review of 50,000 Lending Tree users who received three or more offers from mortgage lenders in May 2022. Study analysts calculated how much borrowers in each of the nation’s 50 largest metros could save if they chose the lowest APR they were offered instead of the highest.
"With home prices and mortgage rates as high as they are, some would-be buyers may be worried that they can no longer afford a house,” said Jacob Channel, LendingTree’s senior economist and author of the report. “But, by shopping around for a mortgage, they may be able to get a lower rate than they initially thought they would, and, as a result, they may find that homeownership is a more achievable goal than it first appeared."
The study also pegged the 10 U.S. cities where homebuyers can save the most cash by shopping around for the right mortgage, as follows, along with some additional takeaways from the study:
- San Jose, CA
- San Francisco, CA
- Los Angeles, CA
- San Diego, CA
- Seattle, WA
- Boston, MA
- Washington, D.C.
- New York, NY
- Denver, CO
- Portland, OR
--- Borrowers in the nation’s 50 largest metros can save an average of $63,151 over the lifetime of their loans by shopping around for a mortgage. That breaks down to about $2,100 a year, or around $175 a month.
--- San Jose, Calif., San Francisco and Los Angeles borrowers can save the most over the lifetime of their mortgages. Across these metros, borrowers can save an average of $109,185 over the lifetime of their loans. Seattle (No. 5) is the first non-California metro to appear on the list.
--- Across the 50 metros, the average spread between the highest and lowest APR offered to borrowers is 82 basis points. Getting offered a 30-year loan with a rate 0.82% lower than another can help you save tens of thousands of dollars (or more) over the lifetime of your loan.
--- Riverside, Calif., Raleigh, N.C., and Hartford, Conn., borrowers see the largest spreads between the average lowest and highest APR offered. In these metros, the spread is 90 basis points — eight basis points above the 50-metro average. But despite having the biggest spreads, lifetime savings aren’t the highest here, as borrowers in these metros have substantially lower average mortgage amounts than those at the top.
Other Ways to Save on Buying a House Right Now
With homebuyers largely at the mercy of the Federal Reserve and higher interest rates, there are some additional steps they can take to mitigate the high cost of buying a house.
These moves are at the top of the list.
Negotiate on fees. Many banks and mortgage lenders include "junk fees" that can be negotiated and contrary to popular belief vary between lenders.
“Negotiating or cutting these fees impacts affordability,” said Yatin Karnik, a former mortgage executive at Wells Fargo and founder of Confer, Inc., a company that helps residential homebuyers find affordable mortgages. “For example, if one bank charges $1,000 for title and escrow fees, but another bank charges $5,000 for the same fee, that is factored into the cost of the loan. When you amortize that difference of $4,000 over 15 or 30 years at the prevailing interest rate there is a larger impact on the overall mortgage monthly payment.”
“Consequently, negotiating these "junk fees" can dramatically affect the overall cost of the loan,” Karnik said.
Make extra payments. Making additional payments adds up over time into something tangible.
“It helps to make bi-weekly mortgage payments,” said Charles Weinraub , CEO at Handsome Homebuyer, a home sales services platform. “In doing so, you get to pay down on your mortgage faster than you can imagine.”
Don’t aim too high, price-wise. Don’t go for houses beyond the range of affordability.
“This happens because most homebuyers feel they can afford the house just because they qualify for the loan,” Weinraub said.
Avoid prioritizing the beauty of the house over the neighborhood and community. “This is often due to the high tastes of the homebuyer,” Weinraub added.
Rushing to renovate and refurnish. A “hurry up” approach to home design and livability is another budget killer.
“This often happens when the buyer hurries to get the house ready to be occupied on time,” Weinraub added.
