First-time buyers and veterans may be facing increasing obstacles to affording homeownership. In response, mortgage applications for home purchases involving Federal Housing Administration and Veterans Affairs loans are falling. The loans tend to be popular with first-time buyers, veterans, and those with lower incomes less able to pay a large down payment for a home purchase.

“First-time home buyers who rely on these government programs are increasingly challenged by both the rapid increase in home prices and higher mortgage rates,” Mike Fratantoni, chief economist of the Mortgage Bankers Association, said in a statement.

A survey by the National Association of REALTORS® in the summer of 2021 showed house hunters using conventional financing were edging out buyers using government-backed loans. Eighty-nine percent of sellers would be more likely to accept an offer from a buyer with conventional financing. Only 30% said they would be willing to accept one using an FHA or a VA loan.

Buyers who are making an offer using FHA or VA financing are finding it difficult to compete against buyers who are offering cash or using conventional financing. Some real estate pros say it’s because VA and FHA loans tend to have low appraisals, problematic when home prices are rising fast and homes are selling quickly. Also, government-backed loans tend to be slower to close.

Nevertheless, mortgage demand softened across the board last week, regardless of loan type, with economists pointing to a sharp increase in mortgage rates.

Total mortgage application volume dropped 8.1% last week compared to the previous week, the MBA’s seasonally adjusted index shows. Also, the average contract interest rate on a 30-year fixed-rate mortgage with conforming loan balances rose to 4.50%, a significant jump from 4.27% the previous week and from the below-4% rates that were more common at the beginning of the year.

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Elevated inflation and the Federal Reserve’s monetary tightening policy drove the latest leap in mortgage rates this week. Since the beginning of this year, mortgage rates have jumped by 1.2%. The typical home buyer would need to spend $250 more every month to be able to purchase a home, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the association’s blog.

The 30-year fixed-rate mortgage moved up to a 4.42% average this week, more than a quarter of a percentage point compared to last week, Freddie Mac reports in its latest mortgage market survey. Rates continued to rise across loan types. “Rising inflation, escalating geopolitical uncertainty, and the Federal Reserve’s actions are driving rates higher and weakening consumers’ purchasing power,” says Sam Khater, Freddie Mac’s chief economist. “In short, the rise in mortgage rates, combined with continued house price appreciation, is increasing monthly mortgage payments and quickly affecting home buyers’ ability to keep up with the market.”

Freddie Mac reports the following national averages with mortgage rates for the week ending March 24:

• 30-year fixed-rate mortgages: averaged 4.42%, with an average 0.8 point, rising from last week’s 4.16% average. Last year at this time, 30-year rates averaged 3.17%.
• 15-year fixed-rate mortgages: averaged 3.63%, with an average 0.8 point, increasing from last week’s 3.39% average. A year ago, 15-year rates averaged 2.45%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.36%, with an average 0.3 point, increasing from last week’s 3.19% average. A year ago, 5-year ARMs averaged 2.84%.

Freddie Mac reports average commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

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Some homeowners are turning to the equity in their current home to fund their next real estate transaction. But the move isn’t without risks.

Most homeowners who bought a home before 2020 have seen rapid appreciation and rising equity in their homes. A cash-out refinance is allowing them to use that equity to help fund their next purchase. They can take out a new mortgage loan for more than what they owe, and then use the cash to buy another property or to make a down payment on a new one.

Cash-out refinances have traditionally been used to pay off debt or fund home renovations or repairs. But homeowners are finding they can also leverage them to complete their next home purchase.

Homeowners with 20% or more equity are likely to be eligible for cash-out refinancing.

Laura Agadoni writes for Motley Fool about how she used a cash-out refinance to fund her last rental property.

But she acknowledges there are some risks to using cash-out refinances to buy real estate. She writes those can have higher costs, between 2% and 5% of the new loan amount. Also, borrowers will be starting a mortgage from scratch and homeowners may be putting their home at risk if they suddenly can no longer make payments.

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Mortgage rates may be moving higher but eager buyers continue to drive loan applications to purchase a home higher as well. Mortgage applications to purchase a home rose 1% last week, the Mortgage Bankers Association reported Wednesday. Home shoppers may be rushing to lock in rates ahead of any further increases.

But higher mortgage rates are taking a toll on homeowners looking to refinance. Mortgage demand for refinance applications fell 15% last week. They are down 60% compared to a year ago.

“Mortgage rates jumped to their highest level in more than three years last week, as investors continue to price in the impact of a more restrictive monetary policy from the Federal Reserve,” says Michael Fratantoni, the MBA’s chief economist.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances—those that are $647,200 or less—rose to 4.80% last week, the MBA reports. That is up from 4.50% the week before.

Housing affordability is weakening as mortgage rates climb. About 87.5 million households are unable to afford a median-priced new home, according to data from the National Association of Home Builders. If the new-home market prices were to rise by just $1,000, an additional 117,932 would be priced out. Read more: How Rising Mortgage Rates Hamper Affordability

Overall, mortgage application volume, for home purchases and refinances combined, decreased 6.8% last week.

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For the fourth consecutive week, mortgage rates surged, up more than 90 basis points in one month.

Rates have jumped from 3.76% to 4.67% in just March alone, significantly increasing the borrowing costs for buyers, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, wrote for the association’s blog.

The monthly payment for a median-priced home with a 30-year fixed-rate mortgage rose more than $170 in March due to higher rates, Evangelou notes.

In the past three months, that amount has been increasing even more. For example, LendingTree offers the following example: A 30-year, fixed-rate mortgage loan worth $300,000 would have cost a buyer about $1,283 a month with the average rate on Dec. 30, 2021, of 3.11%. But at the current average rate of 4.67%, that monthly cost has jumped to $1,551—an increase of $268 a month, $3,216 a year, and $96,480 over the lifetime of the loan.

Still, even with the latest jump in mortgage rates, borrowing costs do remain low by historical standards. From 2002 up until 2009, rates generally were between 5% and 6.5%, LendingTree notes.

However, buyers are facing higher asking prices for homes, and rates are projected to continue inching up.

“Mortgage rates continued moving upward in the face of rapidly rising inflation as well as the prospect of strong demand for goods and ongoing supply disruptions,” says Sam Khater, Freddie Mac’s chief economist. “Purchase demand has weakened modestly but has continued to outpace expectations. This is largely due to unmet demand from first-time homebuyers as well as a select few who had been waiting for rates to hit a cyclical low.”

Freddie Mac reports the following national averages with mortgage rates for the week ending March 31:

• 30-year fixed-rate mortgages: averaged 4.67%, with an average 0.8 points, rising from last week’s 4.42%. Last year at this time, 30-year rates averaged 3.18%.
• 15-year fixed-rate mortgages: averaged 3.83%, with an average 0.8 points, up from last week’s 3.63% average. A year ago at this time, 15-year rates averaged 2.45%.
• 5-year hybrid adjustable-rate mortgages: averaged 3.50%, with an average 0.3 points, up from last week’s 3.36%. A year ago, 5-year ARMS averaged 2.84%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

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Reprinted with permission

Adjustable-rate mortgages can carry some risks, but as rates rise, more home buyers may consider them. ARMs typically have a lower initial interest rate than 30-year fixed-rate mortgages, but the rate will change after a defined duration. Borrowers then must pay the rate set when their lock period expires, which can be risky if rates are moving up at the time.

Even though interest rates currently remain at historical lows, recent increases have been a shock to some home buyers’ budgets. Rates have jumped by more than 90 basis points in just one month. Higher borrowing costs have coincided with higher home prices, too. The median list price for a home has reached $405,000, up 14% compared to a year ago, according to realtor.com®.

The 30-year fixed-rate mortgage, the most common loan option, averaged 4.67% last week, according to Freddie Mac. That is the highest average since late 2018.

On the other hand, the five-year ARM averaged 3.5% last week.

Borrowers considering an ARM need to weigh how they’d be able to handle mortgage rate increases after their fixed-rate term expires, typically after three, five, or seven years. An ARM typically comes with caps on the annual adjustment, but these can vary among lenders.

For example, lenders may cap the increase for the first adjustment at 2 percentage points. That would mean the new rate can’t be more than 2 percentage points higher than the initial rate, CNBC explains. A subsequent adjustment cap clause would tell the borrower how much the interest rate could increase in following adjustment periods. Borrowers should review all potential caps and risks fully with a lender before deciding which loan product to choose.

“I’d also be concerned if you do an ARM with a low down payment,” Stephen Rinaldi, president and founder of the mortgage broker firm Rinaldi Group, told CNBC. “If the market corrects for whatever reason and home values drop, you could be underwater on the house and unable to get out of the ARM.”

Rinaldi told CNBC that ARMs often are chosen for purchasers of high-priced homes because the amount saved with the initial rate could be thousands of dollars per year. But for mortgages under $200,000, the savings could be less, he says.

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