If 2020 was the year of constantly falling interest rates, 2021 may wind up being remembered as the year the brakes were applied. Interest rates are beginning to slowly increase after hitting record lows last year.
Will this sudden uptick to the cost of financing or refinancing a home be a sign of things to come? Maybe. So far, the market is responding predictably to the sudden change. The volume of loan applications, for instance, has shown signs of decline. Early this past April, the Mortgage Bankers Association reported that the highest average interest rates since June 2020 for a 30-year fixed-rate loan meant that mortgage applications dropped by 5% on a week-over-week basis.
Despite this turn of events, mortgage originators should remain confident and optimistic about business-growth opportunities in 2021. These market indicators are affected by many outside circumstances. Peeling away the layers makes it clear: Today’s economy is actually stocked with new openings.
During a rising interest rate movement, undecided individuals may finally move ahead with their dream of homeownership. They may have been sidelined for a number of reasons, but as rates begin to head in a different direction, there’s extra incentive to buy now. The math is simple: An increase of even 25 basis points could result in a substantial amount of additional interest paid over the life of the loan.
For many motivated buyers, rising rates are a cue to begin the home financing process. It’s always important to note that mortgage brokers and loan officers should occupy multiple lending lanes. And you can see now why being purchase-centric in a world focused on refinancing is essential.
With a multipronged strategy, originators can remain as nimble as the market is, seamlessly diverting their resources and attention to clients looking to buy. By getting in front of prospective buyers even as a refinance boom is occurring, they will remember you when the time comes to purchase.
The policy of lower rates is enacted when the economy needs a jolt. It’s understandable how rates continued to decrease in a tumultuous 2020. The rising rates of 2021, however, are an indicator that the economy may be getting better, which is incredible news.
Rising rates correlate with confidence. Regulators, businesses and consumers, for example, must express confidence before rates can move higher. Rising rates translate into a recovering economy, which is typically associated with a growing labor market, higher wages, positive consumer sentiment and greater stock-investment activities.
While inflation is a concern, there’s a general sense that its effect will be negligible given all the positives. And while rising rates seem like a step in the wrong direction, they actually can indicate that conditions remain enticing and housing demand is in full force.
The bulk of refinance business may well be over. Rates remain low, but the new interest rate realities will divert competition toward homebuying services.
For more evidence of this shift, requirements for loan-to-value and debt-to-income ratios are being loosened. This is yet another sign of the expectation that there will be more purchase loan clients, including those applying for jumbo loans.
Still, refinances aren’t going away entirely. Black Knight reported in late March 2021 that 11.1 million homeowners were high-quality refinance candidates. This number has been dwindling, but it still represents a large pool of prospective business.
Loan officers should always remain focused on the purchase market. Even with the high volume of refinance business, it is fundamental for any originator to nurture both clients and referral markets on the purchase side.
For mortgage originators, there’s nothing quite like helping a family achieve homeownership, and it’s a big reason why they stay in the business. Being a part of this process holds even greater value in the world of COVID-19, when homeownership has taken on a whole new meaning for many.
Thankfully, the market hasn’t shown many signs of weakness, despite all of the challenges. Loan officers and brokers who focused on the purchase market over the past year may be seeing their efforts paying dividends now.
The fact is that today’s rates remain quite attractive given how far they’ve come. The 30-year mortgage was hovering near 5% in late 2018, according to Freddie Mac. Early this past April, however, it stood just above 3%. Yes, the market appears to be readjusting, but it’s still being fueled by rates that do not have a major impact on affordability. Financing a home purchase is not out of reach for many.
Sure, there will be some ramifications with this new trend, but the bigger question is, will it be enough to dramatically change the course of today’s robust real estate market? Probably not. Home purchases will continue and with a little extra luck, there may even be some new inventory that can help relieve the pent-up demand.
With steps being taken toward reopening the economy and getting a better handle on the pandemic, another influx of future homebuyers will emerge and leave their mark. Are you ready to leave yours? By staying ready and well prepared to assist every client, no matter their financial goals, you can make the most of every chance to expand business and elevate yourself as the go-to mortgage professional who can do it all. ●