5 Mortgage Trends To Watch

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Buyers have fueled a red-hot housing market over the last year as they rushed to secure record-low mortgage rates. But shifts are underway, which may affect borrowers planning for their next home.

1. Rising rates. “Interest rates below 3% on a 30-year fixed-rate mortgage aren’t likely to be around long,” says Lawrence Yun, chief economist of the National Association of REALTORS®. Rising inflation and a strengthening economy are expected to push rates up. Yun predicts that by as early as year’s end—but likely by next spring—30-year fixed-rate loans will average 3.5%. Higher rates and home prices could push some would-be buyers out of the market.
2. Strict qualifications. Lending standards tightened during the COVID-19 pandemic as lenders looked to avert risk, notes Tendayi Kapfidze, chief economist at LendingTree. Standards could ease a bit as the economy keeps improving and refinancings become a smaller share of total mortgage lending, says Guy Cecala, publisher of Inside Mortgage Finance. Still, the most favorable rates will go to borrowers with stellar credit histories—scores of 750 and above—and large down payments. Lending criteria in the hot vacation and second-home market could be a different story. .Due to tightened underwriting criteria, second-home buyers could face steeper rates.
3. Larger mortgages. Higher home prices are leading to larger loan amounts. In March, the average mortgage taken out on a new-home purchase reached a record-setting $374,000, up from about $332,000, two years earlier, according to the Mortgage Bankers Association. As more people upsized their space in the pandemic, sales in upper price brackets outpaced those at lower price points. Applications for mortgages larger than $766,000 jumped 55% year over year in February, the largest jump in any price range, according to the Mortgage Bankers Association. By contrast, mortgages in the $150,000–$300,000 range decreased by 2%.
4. More nonbank lending. Borrowers have more options as nonbank lenders gain market share. “Nonbanks are competing more on rates and underwriting than banks have been, and that’s particularly been true over the past year,” Cecala says. “That likely will continue. As of now, banks appear to be content competing from the sidelines.” The top five U.S. banks—Wells Fargo, Bank of America, JPMorgan Chase, US Bancorp, and Citigroup—comprised only 21% of total mortgage originations last year, a decline from their 50% combined market share in 2011, according to Business Insider Intelligence’s Online Mortgage Lending Report. Alternative lenders are offering traditional financial products often at lower costs, with more relaxed eligibility criteria, and expanded digital options in loan processing. Quicken Loans (now known as Rocket Mortgage) issued the highest dollar amount of single-family loans in 2020, according to an analysis of 2020 Home Mortgage Disclosure Act data.
5. Rate lock-in effect. Some owners aren’t selling because they don’t want to give up their existing ultra-low interest rate, thus squeezing supply and placing upward pressure on home pricing, Kapfidze says, adding “this could be a challenge to the housing market going forward.” But Yun offers a broader view, noting that mortgage rates aren’t the only factor potential sellers consider. Some seek more space or the new flexibility to work remotely and live anywhere.