Well-Qualified Borrowers Are Paying Much Lower Mortgage Rates

House prices have cooled and will likely decline in some of the hottest markets. However, on my quest to get financing to conquer my real estate FOMO, I realized a positive datapoint for the U.S. housing market. Well-qualified borrowers are paying much lower mortgage rates than the headline rates you see in the news.

There has been a ton of talk about how 5%+ interest rates for 30-year fixed-rate mortgages will really put a squeeze on buyers. If you have to go from paying 3.25% to 6.5% for a new mortgage, I'd believe it. However, I don't think that's exactly what's happening for all borrowers.

Since the 2008-2009 global financial crisis, lenders have become much more strict. At the same time, borrowers have gotten much more qualified. I've refinanced multiple mortgages since 2009 and each time was more painful than the last.

Therefore, I doubt home prices will drop too much. A 5-10% decline seems reasonable. But for those cities with a surge in upcoming supply, the price drops could be more severe.

Why Plenty Of Borrowers Are Paying Lower Mortgage Rates

Let's first define what a well-qualified buyer is. A well-qualified buyer is someone who has over an 800 credit score. In addition, the borrower has a debt-to-asset ratio of less than 30%. Before the financial crisis, borrowers with a 760 credit score or higher were getting the best mortgage rates. Now the hurdle is higher.

With a rise in mortgage rates, more people are getting adjustable rate mortgages. They have long been my preferred type of mortgage since 2003. Matching the duration of your ownership with the fixed-rate period of your mortgage is an optimal financial move.

ARMs have lower rates than 30-year fixed-rate mortgages. To pay a higher mortgage rate for a period much longer than you plan to own your home or pay it off doesn't make good financial sense. The average homeownership tenure in America is about 10.5 years.

There is currently elevated concern that higher inflation will last for longer. However, inflation is a self-correcting mechanism that eventually reduces demand and brings down inflation.

Latest inflation data Consumer Price Index through May 2022

To think ARM borrowers who have 5-10 years left on their fixed-rate periods are doomed fails to recognize inflation normalization.

Yet still, less than 10% of new mortgage borrowers are getting ARMs. Meanwhile, only about 5%-6% of total mortgages consist of ARMs. It's surprising how slow Americans are to change after 40+-years of declining interest rates.

The peace-of-mind premium you pay for having a 30-year fixed-rate mortgage has value. Just make sure you do the math to calculate exactly how much you will be paying for this certainty to see if it's worth it.

Interest Rates On Adjustable Rate Mortgages May Be Lower Than Expected

One of the main reasons I write from firsthand experience is because important details are often missed compared to just reporting the news. Money is too important to be left up to pontification. It's better to experience something directly to go through the various nuances.

Because I found a forever home in 2020, I hadn't been in the market to buy a new home or get a new loan until now. Like many of you, I was just monitoring the latest 10-year bond yield and headline mortgage interest rates.

Therefore, before inquiring with my main bank about the latest mortgage rates, I estimated the bank would respond with a 4% – 4.35% interest rate on a 7/1 ARM.

As I currently have a 7/1 ARM at 2.125%, I just mentally added 2% to my rate since that was the average mortgage rate increase since early 2022.

10/1 ARM Offer Example

Unexpectedly, here's what I was offered. The below rates are based on a $4.125 million loan after putting 25% down on a $5.5 million house. I figured, might as well ask for the maximum to see what Citibank has to offer and go down from there if the money is not needed.

The rates also assume I remain a Citigold client with $2 million or more in assets post the down payment. Relationship pricing helps lower mortgage rate offers between 0.125% – 0.375%.

Latest mortgage rates for borrowers - 10-year adjustable rate mortgage quote from Citibank

The left side of the chart shows a 10-year adjustable rate mortgage at only 3.25% with -0.125 points, $11,955 in fees, and a $17,952 monthly mortgage payment. The payment includes principal and interest.

The right side of the chart shows a 10-year adjustable rate mortgage at only 3.25% with 0.125 points, $22,267 in fees, and only $11,172 a month in payments. The payment is interest only.

The quoted 3.25% mortgage interest rate was 1% lower than expected. Further, it is ~2% lower than the average 30-year fixed-rate mortgage. As a result, my interest in buying this new forever home went up!

The only thing that bummed me out were the mortgage fee quotes. So I asked the banker to clarify.

Clarification On Mortgage Fees For Borrowers

Here's what the banker said.

“The fees are a guesstimate that the pricing engine uses. A lot depends on the final loan amount and the location of the property—title companies, escrow companies, appraisers rates vary a lot across the state.  The actual closing costs are almost always less than these estimates. When a property is finalized, you will get a loan estimate accurate to the penny within a day. 

Also, you will see that the estimate on the left has negative 0.125% points (in other words, a credit to you of about $5200) at the note rate I selected. The one on the right has a positive charge of 0.125 which means in addition to the third party fees, Citi is charging you 1/8 of a point for that specific note rate.  When I quote rates, I try to get as close to zero as possible. 

There is a wide range of note rates and if you want we can raise the note rate and increase the credit and apply that credit to “pay” all the 3rd party fees. Conversely if you want a note rate in the middle to high twos we can do that too, but the points will increase. 

On a loan this big, the $$$ amount of even an eighth change is huge.”

Big loans, big fees indeed! Bigger loans is the main reason why you can conduct a no-cost refinance. The bank will simply charge you a slightly higher rate to cover the loss of fees and then some.

A Comparison Of Mortgage Rates Based On Points And Credits

Personally, I think it's better to get a no-cost refinance. Even though you will be paying a slightly higher rate, if the rate is below your existing mortgage rate, you will be instantly winning from day one. You won't have to worry about break-even periods. Thus, if you decide to sell six months after refinancing, you will have still gotten six months of winnings.

As to getting a new no-cost mortgage that's higher than your current mortgage rate, this decision is trickier. You must first calculate the breakeven period based on the fees and then estimate how long you think you'll own the mortgage.

Below is a screen shot of a range of paying points (fees) for lower mortgage rates and receiving cash credits for higher mortgage rates. Rates have moved up and do change every day. But my point is that for well-qualified borrowers, we are offered much lower mortgage rates than the average.

Mortgage rates and fees example by points and credits and rates

My eyes immediately zeroed in on the lowest rate where I would still get a credit, which was 3.375%. Then I looked at the $55,077 credit I would receive if I agreed to paying a 3.625% mortgage rate. Very enticing!

Takeaways About Mortgage Rates And Money In 2022

The first takeaway from this exercise is well-qualified borrowers can get much lower mortgage rates than what we read in the headlines. I thought I was going to be quoted 4% – 4.25%. Instead, I got quotes in the 3%-range.

Further, I thought the 4% – 4.25% quote was going to be for a 7/1 ARM. Instead, I got quotes for a 10/6 ARM ( rate adjusts every six months after the 10-year fixed-rate period is over).

Related post: The Difference Between a 5/1 ARM and A 5/5 ARM

Average FICO credit score in the United States through 2021

The second takeaway from this exercise is to actually get some mortgage quotes and talk to a mortgage banker. You might be surprised by how much better mortgage rates you can get.

Citibank has traditionally not had the lowest mortgage rates. Therefore, I'm now going to reach out to Chase and Wells Fargo to see if they have even better rates. I'm also going to get a free quote online since it's easy and free to do. Then I'll make the lenders compete against each other.

The third takeaway is to not take averages at face value. Whenever you hear a soundbite like “50% of Americans can't come up with a $400 emergency expense,” take it with a grain of salt. Identifying who is average is very difficult given we all have our unique set of circumstances.

The fourth takeaway is to not be average! You can easily be far above average financially if you just read a great personal finance book and start saving and investing just 10% of your income. The average American doesn't read personal finance books and has gone back to saving less than 5%!

More Home Buying Opportunities Are Coming

Not all homebuyers are getting as squeezed as much as you might think. Especially since the vast majority of existing mortgages have rates below 4%. As a result, the downturn in the housing market likely won't be as severe.

If you're a well-qualified buyer with a lot of cash on hand, be patient for more upcoming opportunities. If you want to upgrade your home, you will likely find better deals in a year or two.

As you can see from the latest home purchase mortgage applications index for the U.S., interest has declined. When the average 30-year fixed rate mortgage is above 6.5%, demand drops off. Sellers and buyers are in a standstill as both supply and demand decline.

US Home Purchase Mortgage Applications Index

The one risk for patient homebuyers is a potential sudden decline in interest rates. If inflation peaks by say August 2022, mortgage rates will likely decline causing a risk-on appetite for many asset classes, including real estate. If so, the short window for getting a real estate bargain will close.

Then it's back to bidding against people who seem to have an endless supply of funds again.

At this time, I don't think it's wise to take on debt to buy property. Instead, I think it's much better to be surgical in your real estate investing by dollar-cost-averaging into public REITs or private real estate funds without debt.

My favorite real estate investing platform is Fundrise, as they offer funds focused on single-family and multi-family rental properties in the Sunbelt. With Fundrise, you can invest as little as $10 at a time.

If inflation finally shows clear signs of turning, it will be risk on again in stocks and real estate. You want to be well-positioned for an eventually turn around.

Reader Questions

Are you getting quoted much lower mortgage rates than the reported averages? Are you more inclined to take out an ARM versus a 30-year fixed-rate mortgage? If you are in the lending industry, what types of loans are more borrowers gravitating towards?

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21 thoughts on “Well-Qualified Borrowers Are Paying Much Lower Mortgage Rates”

  1. Sam – are you still seeing well qualified borrowers getting lower rates – if so, how low and from who (e.g. FR, Citi, etc.). What is your guidance for a well qualified first time home buyer in this environment?

    1. Well-qualified borrowers are still getting much lower mortgage rates than the average you see from the Freddie Mac PMMS survey. In fact, all borrowers might be able to get better rates than average now since rates have gone up so much, business has dried up.

  2. Jumbo 30 in SF have been considerably cheaper than the averaged fixed conventional for a while now, and there was a plenty long window in 2020-2021 to get a mid 2s rate. Whereas historically jumbos cost a premium because they could not be resold to Fannie/Freddie, the stability of real estate here makes it a low risk for investors that want better return rates.

    Folks should be getting rate quotes from all the players. Better yet, have a relationship with an actual person as the big banks turn on/off the spigot of money constantly. Citibank was the most competitive in early 2020 (with the Citigold discount), but I worked with the broker over several months before the opportunity to get to 3.25 came. A year later, they were not competing for business, and I went to BA at 2.625. We’ll see if fixed or ARMs ever get back there.

  3. Very interesting considerations here. Sam’s real estate posts are my favorite topic on this blog. I think there is one fallacy in this argument, and it is the assumption of “normalization of inflation”.

    In 1981, mortgage rates climbed to 18% while the Fed fought inflation. Today, inflation is stated to be the “highest since 1980”, but in reality is higher when you consider the methodology used to calculate the CPI has undergone numerous revisions since the 1980s and today substantially understates the magnitude of inflation compared to back then. And, it’s just getting started. To fight off inflation, the Fed Funds rate needs to go much higher…like it was in the early 1980s when it hit 16%. Today they are talking about hiking rates incrementally up to 2% and crossing their fingers that doing so doesn’t pop the asset bubble. These small rate hikes cannot get inflation under control when the Fed’s balance sheet has increased from about $0.8 Trillion in 2007 to $9 Trillion today. To assume that low interest rates can be sustained indefinitely, or that we can return to that environment without causing serious damage to the Dollar, completely ignores the reality of an over-bloated easy money monetary policy that has become unrestrained over the past 2-3 decades. They have “fed the beast” without “taming the beast” for far too long; the assumption that this is sustainable is quietly and subliminally pushed by Washington and Wall St and is the biggest Con of our generation.

    In 2021, I purchased a property with a 30 year fixed rate of 2.75%. If I had gotten an ARM last year, my rate would have been maybe 0.5% less but I’d be regretting that. For my second property in 2022 I am still choosing a 30 year fixed rate at 4.375% over an interest-only ARM. Like Sam has keenly pointed out, while these rates seem high, they are still negative rates relative to inflation. I think the better play is to lock in as low of a rate for as long as possible. The difference of 1% over the next 10 years will likely be insignificant compared to the costs of entry in 20 years.

    1. The great thing is about inflation and interest rate predictions is we’ll see who is right or not!

      I’m pretty certain inflation will decline by 2023. We are already seeing a decline with the 10-year bond yield coming off 0.5% in the past month.

      Let’s see.

      1. IMO…
        Fed interest rates are less relevant with current gas and fertilizer prices
        If German manufacturers go into winter without gas, it’s a major supply issue all over again, more inflation.

  4. I was able to get a “one time close” 7 year ARM at 4.25% for a new construction ($950K loan).

    1st 2 years interest only while the construction is going on. It’s a newer product I’m told.

    Functions like a construction loan until house is built. I was glad I did not need a construction loan and then a new loan in a year or so. Took a lot of pressure off.

  5. Thanks for the post Sam!

    The credit unions in my area have been very slow to increase their rates and was fortunate enough to get a free extended lock for a 5/5 ARM at 3.7% with a state credit union for a $2500 LO fee. There is another credit union in my area that offered a 5/1 ARM at 3.25% but has a $5,000 fee. Due to the rapidly rising interest rate environment we’re in, I feel very good about getting the 5/5 ARM for just a slightly higher interest rate and lower fee. My friend is a mortgage loan officer and his ARMs and 30 year fixed rates were oddly the same and the lowest rate I could get with them was a 5.25% with a .1875 extended rate lock fee and a $1200 fee. The savings by getting the 5/5 ARM over the 30 year fixed was $760mo. This is only a $560,000 home so the savings is substantial.

  6. I completely agree with your analysis on ARMs. I’ve never had a 30yr mortgage. Currently have 9 years left in 10Y IO ARM at 2.375%. Prior to that I had a 7Y IO ARM at 2.5%. I’ve never paid a dime in principal and my house has more than doubled in 7 years and will probably be worth more in 9 years than it is today. in 9 years, my youngest will be 12 and I’ll look to do one more ARM loan to make it to empty nester. 10Y IO ARM is the best deal in the market but only a few banks offer these loans and they are tougher to qualify for.

    1. So, you never want to pay off a home? Interest only indefinitely? What happens when homes stop appreciating or decline in value? Aren’t you just paying rent at that point?

  7. Sam, In the current rate environment it would be interested to see a comparison between some of the current ARM loans offered vs a 30 year fixed loan in terms of rates being offered, APR, and payoff amount/timeline. As someone who is considering a home purchase, that I would like to hold for a long time and eventually pay off I am trying to decipher the pros and cons of a fixed rate vs ARM. I have a high credit score and would likely qualify for the best rates on any loans as you discuss above. My main concern is for the ARM’s it seems the rate and APR are lower, however it looks like you pay off less principle early on so not sure if this delays the payoff timeframe/opportunity down the road.

  8. Roy David Farhi

    timely article as ARM’s is indeed the most overlooked tool of the mortgage industry. So many are told “growing up” save up 20% and take out a 30-year conventional loan. Well, a 1.5-million-dollar house is 300K and is a Jumbo Loan and the DTI is going to be prohibitive for most folks to meet. I think using these alternative methodologies as you mention Sam are all worth checking out. NO is not the final answer but the start of the conversation. Lastly, thresholds are reality in FICO scores as 580, 620, 720, 800, etc. mean something to lenders.

    1. A 1.2M mortgage is probably suboptimal anyway in that scenario. Sam used to say 1M but updated to 750K being the ideal mortgage for those that can afford it.

  9. I am not typically big on getting lots of quotes for things, but mortgage is such a large ongoing cost. So for that I do aggressively search out the best deal and get lots of quotes when in the market for one.

    Currently I have a 3.125% fixed rate that I took out a few years ago in a refi. My refi was for 30 years, I think I have 26 or 27 left.

    I guess I would theoretically consider an ARM but that would depend on how much cheaper a rate, plus how long I thought I would keep the mortgage.

  10. I’m extremely well qualified (and willing to put more than 20% down depending on the sale price) but I’m still getting quoted 5.45% for a 30 year fixed and 4.375% for a 15 year fixed. I haven’t looked into an ARM.

  11. My ARM is likely going from 3% to 5% in February. What is the best way to find mortgage bankers to talk to?

  12. Sam, for investment properties the interest rate is much higher, how would you get the rates you in the chart?

    1. To get a the APR of a primary resident, you can make the property your primary residence at first then move out later. Most lenders only require you to live in the home 1 year before you can rent it out. That might not be feasible for your situation, but there’s probably no other loophole here.

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