Homeowners may have difficulty securing a mortgage amount

When mortgage rates rose from record lows in early 2022, the housing market ground to a halt.

In less than ten months, interest rates on 30-year fixed mortgages rose from the low 3% range to more than 7%.

Although a 7% mortgage rate has historically been considered “reasonable,” the rate of change in such a short period was unprecedented.

Mortgage rates increased by about 120% during that period, which was actually worse than the 1980s mortgage rates I had heard about in terms of speed of change.

The rapid rise in interest rates was sharp enough to introduce us to a new phrase: mortgage rate fixing.

In short, existing homeowners became trapped in their properties overnight because they could not leave low interest rates behind and replace them with much higher rates.

Either because it was too expensive or simply unattractive to do so.

And there’s no quick fix because your typical homeowner has a 30-year fixed mortgage in the 2-4% range.

Mortgage rates have fallen, but what about loan amounts?

There has been so much focus on mortgage rates that sometimes I feel like everyone has forgotten about the extremely high loan amounts.

Mortgage rates rose to 8% last year, but have since fallen to about 6%. It can be obtained at a lower price if you pay discount points.

So, in some ways, mortgage rate fixing has been eased, but housing affordability is still constrained.

For the typical homebuyer who needs a mortgage to close the deal, there are two key elements to the purchasing decision. Ask price and interest rate.

As mentioned, rates are much higher than they were before, but are down about two percentage points from their 2023 highs.

The 30-year fixed yield was 7.79% during the week ending October 26, 2023, which was not far from the 21st century high of 8.64% recorded in May 2000, per Freddie Mac.

However, house prices did not fall. While many seem to believe that there is an inverse relationship between mortgage rates and home prices, this is simply not true.

To be sure, currency appreciation may have slowed its unsustainable pace, but prices have continued to rise despite significantly higher rates.

And if we look at where home prices were before the pandemic and where they are today, they’re up about 50% nationally.

In some metro stations, it rose even more. For example, they’re up nearly 70% in Phoenix since 2019, according to Latest Redfin data.

So when you look at how mortgage rates are falling, you may start to focus your attention on home prices.

While a mortgage rate of 5.75% seems fairly acceptable at this point, it may not be any less when combined with the loan amount that has doubled.

Example of securing the loan amount

Let’s consider an average-priced home in Phoenix, Arizona. It was priced at $265,000 in August 2019, per Redfin.

Today it is close to $450,000. Yes, that’s the 70% increase I mentioned earlier. Now let’s imagine that the homebuyer put down 20% to avoid PMI and get a better mortgage rate.

We might be looking at a 3.50% rate over 30 years in mid-2019. Today, that rate might be closer to 5.75%.

When we take into account both the higher mortgage rate and the much higher loan amount, the difference is about $1,150 per month. Only in principal and interest.

The down payment is also $90,000 versus $53,000, or $37,000 higher, which could be a deal-breaker for many.

This explains why so few people buy homes today. The double whammy of a high mortgage rate and high sales price put it out of reach.

But what’s interesting is that if the loan amount was the same, the difference would only be about $285, even with an interest rate of 5.75%.

So you can’t blame too high interest rates at this point. Sure, $300 is more money, but it’s not a lot more money for your monthly mortgage payment.

Which is much better than the $1,150 difference with the higher loan amount.

In other words, you could say that current homeowners looking to move are not tied to their mortgage rate as much as they are tied to the loan amount.

What you can do to combat loan amount restriction

If you already own a home and are struggling to understand how to move, there is a possible solution.

I actually had a friend do this last spring. He was moving to a larger house in a nicer neighborhood, despite having a fixed mortgage interest rate of 2.75% for 30 years.

To deal with the sharp increase in interest, he used the sales proceeds from the sale of his old home and applied them to the new mortgage.

The result was a much smaller balance, despite the higher mortgage rate. This means that the interest accrued is much lower, despite the higher monthly payments.

He did this when rates were in the 7% range. There’s a good chance he’ll apply for a rate and refinance term to get a rate in 5 seconds, at which point he can move forward with a new 30-year term and lower his monthly amount.

If he prefers, he can make additional principal payments to continue saving on interest, or simply enjoy payment relief.

Either way, reducing the loan amount to something more comparable to what it was before, using sales proceeds, is one way to bridge the gap.

The big upside for many current homeowners is that they got cheap rates and have a lot of home equity at their disposal.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.

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