What to Know about the new Mortgage Rates
With new mortgage rules in place, some homebuyers may find themselves worrying over their impending mortgage costs and if now is the right time to buy. A quick glance at a headline or hearing a snippet of the news could have homebuyers thinking that having a higher credit score will result in paying more for a mortgage. While there are many factors that affect mortgage rates, the rates that went into effect on May 1, 2023 bring with them new changes for homebuyers.
Aside from geographic location, one of the biggest factors to consider is a buyer’s credit score. A homebuyer’s score is used to help banks and other loan institutions determine a person’s risk as it relates to paying bills on time. Having a high credit score shows lenders that someone is a low risk and typically results in a greater chance of being accepted for a loan and, hopefully, a lower interest rate.
Impact from Credit Scores
Under the new rates, buyers with a credit score over 680 will pay an estimated $40 a month more on a $400,000 mortgage. That is an increase of $480 in interest for one year and $14,400 in interest over the course of a 30-year loan. See the chart from Fannie Mae for reference.
A homebuyer with a 95% loan to value and a credit score under 640 will see their fees reduced by 1.75%. Those with a 720 to 759 credit score putting 15-20% down will have an increase of 0.75% in fees.
In response to these changes, Sandra Thompson, the current Director of the Federal Housing Finance Agency (FHFA), stated, “The new framework does not provide incentives for a borrower to make a lower down payment to benefit from lower fees. Borrowers making a down payment smaller than 20% of the home’s value typically pay mortgage insurance premiums, so these must be added to the fees charged by the Enterprises when considering a borrower’s total costs.” This highlights the importance of consulting a financial professional to identify the best path forward that considers all fees and costs.
The Impact on buyers
Because it can be easier to refinance a mortgage loan with a higher loan amount, loan servicers are offering lower interest rates for lower loan amounts. For there to be financial benefit in refinancing at $150,000 or less, a buyer will need an interest rate 1-1.5% less than what is already in place. If the loan amount is higher – for example, $300,000 and above, a homebuyer might only need to lower the interest rate by 0.5% for there to be a financial benefit.
The new rates may present challenges for prospective homeowners. It’s important to be aware of the financial impact of your down payment, credit score and other factors. To speak to a financial advisor, please contact our team below.
*Enterprises refer to Fannie Mae, Freddie Mac and the Federal Home Loan Bank System.
This is not a solicitation or recommendation to purchase or sell any investment product or service and should not be relied upon as such. These materials are based upon publicly available information and are provided for general information and educational purposes only. Although the information contained herein has been compiled from data considered to be reliable, we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Investment advisory services offered through Sikich Financial, an SEC Registered Investment Advisor.
