Will Mortgage Rates Drop in 2024? What 2023 Changed for Home Buyers

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The first show of the year

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, I am the Mortgage Mom, and it is 2024. This is the very first show I'm doing in January of 24 and it feels great to be here. I'm excited for 2024, I'm excited for what is to come. I thought it would be a great show to recap what we saw take place in 23 — some of the hurdles we had to go through, some of the benefits that came out of those hurdles — and then what we can expect moving forward.

I do want to apologize to everybody, since we have not been on. We went dark for the week of Christmas and New Year's, and I forgot to reactivate our text campaign, so that will go out shortly. Moving forward I promise to keep it active and the text will go out the minute we start.

What actually got better in 2023

Every week our secondary desk — that's our lock desk, our pricing desk — keeps us up to date on what announcements are coming, what we can expect from rates, whether we should be locking or floating. The email that came in this week made a lot of great points, so I'm going to walk through it with you.

It said the high rates combined with even higher home values made the barrier to homeownership the highest on record for first-time home buyers. Almost every bank was mandated to increase homeownership in areas deemed lower and middle income neighborhoods. The result was several new programs designed to help build up those communities with new homeowners — and we have access to them here.

That's the first thing. It was very, very difficult this year for a first-time buyer to jump in with two feet. It was the worst year on record in that regard. Things were expensive, home prices were high, rates were high, and it made it virtually impossible for somebody to buy their first home. But that pushed the banks to introduce new programs to give us the opportunity to get first-time buyers in the door.

One of the programs brings the mortgage insurance premium down to a lower level, and it also helps with pricing, so your interest rate is a little better than what you'd get on a normal conventional loan. It's really aimed at making that payment more affordable for a first-time buyer. If you've been thinking about buying and you didn't think it was possible, call the office — there really could be a program that came out of 2023 that moves you forward in 2024.

And there are updates coming. One of the programs should soon allow an even lower mortgage insurance rate. The other should soon allow lender grants to be used alongside it. We've also been working on a lender grant, and we currently have a lender-paid temporary buydown available on one of them, which makes it even more attractive.

What a temporary buydown is, and what changed

A temporary buydown is usually paid for by the seller. A buyer cannot pay for it on their own, and up until now, neither could the lender.

Here's how it works. Say the rate is 7% today — and this is an example, I am not quoting a rate. The seller pays for the buydown, negotiated in your contract, and it brings your rate down for the first year. A one-year buydown at 7% takes you to 6% for that first year, making your payment lower. There's also a 2-1 buydown, which buys the rate down 2% in the first year: instead of 7%, you're at 5%, then 6% in the second year, then 7% in the third.

Knowing rates are on their way down, this is a great way to bridge the gap. Get the seller to buy your rate down so you can afford the payment today, and you've got a year or two to refinance into permanent savings.

What's new is the lender-paid version. We couldn't do that before. Now, as the lender, we can offer to buy that rate down for you for the first year if you can't get the seller to do it. That is a fabulous thing to come out of a really hard year.

Home equity loan vs. home equity line

A home equity loan, to keep it simple, is a principal and interest payment based on a term — very similar to your mortgage payment, a car payment, or a personal loan. They take the whole balance, amortize it over the term you choose, and that's your monthly payment, at a fixed rate. I love that option for somebody who doesn't have the cash to pay it back in big chunks. If you're consolidating debt, it's a great option.

A home equity line of credit is basically a credit card. It's a line you can draw on, you make an interest-only monthly payment, and it's typically open for about 10 years before it has to be paid in full. The rate is adjustable. If you flip homes and you need cash to buy a property in shambles that can't get financing, a line is great — buy it cash, renovate, sell, pay the line back off. But if you carry a balance for a long period and the rate keeps climbing while your payment isn't paying it off, you're on the same treadmill as your credit card. So is it good for debt consolidation? I don't personally think so.

Why 2023 became the year of home equity borrowing

Because rates were so high, we saw a massive resurgence in home equity lines and loans. Almost everyone who owns a home has seen their property go up in value — not every pocket of the country, but the majority of homeowners have seen record appreciation over the last four or five years and are sitting on significant equity.

Normally, someone who needs cash to pay off debt, put a kid through college, do renovations or buy another property would refinance the whole loan, take the cash, and lower their rate at the same time. In 2023 that just wasn't an opportunity. So they went to home equity lines and loans instead.

That started at the end of 2021 and beginning of 2022, and 2023 was the year of it. The good news is that it brought a lot of new product. For a long time these weren't a big thing — a straight 30-year fixed refinance was how people got cash. Now there are more lenders offering them and more guidelines, including for harder-to-document self-employed income. If you need $75,000 or $100,000 for debt or home improvements, there's a lot of opportunity available now that didn't exist before. And that continues until first-mortgage rates come down further.

Rates: the story of 2023, and the December turn

Rates were really the story of 2023. They were horrible from August through November, and the lack of premium hurt any borrower who had anything other than perfect credit and a conforming loan amount. If you didn't have perfect credit, or a nice down payment, or you were going jumbo or into high-balance pricing, the rate was astronomical. It put a lot of buyers' hopes of owning a home on hold.

Then the recent rally made it a December to remember, as rates dropped to the lows seen in July — and with them, premium came back to help facilitate loans for borrowers with less than perfect credit or jumbo-sized loans. We actually saw more loan applications in December. A normal December is usually one of our worst months of the year for application volume, and instead the numbers ticked up.

Here's the forecast, and I agree with it completely: I expect rates to continue to go lower in 24. As quickly as they went up in 22 and 23, they can go that quickly back down. I could see rates in the fives, but it will all depend on the outlook for Fed rate cuts. As soon as it becomes clear that they are ready to cut, watch out.

We don't know when the Fed says it's time. We know that for the last three meetings in a row they held rates steady — no increase, no decrease — and gave us all that talk about higher for longer. There's a big question mark about what higher for longer actually means. Three meetings? Six? Nine?

But they also said they anticipated cutting rates at least twice in 2024. Obviously the Fed can change its mind, but many times they do stick to the plans they make public statements about. So I really do believe we're going to see at least those two cuts, and when we do, rates come down and come down fairly quickly.

That's going to put a lot of people back out on the street looking at homes, which makes it very difficult to get an offer accepted if you've got a lot of competition. So how do you make sure you're one of the people who accomplishes their goal in 24? Call the office and get started. Do your application. Know what you qualify for, what your payments would be, what your options are. When the home you want comes on the market, you need to be able to strike fast.

The refinance opportunity nobody is thinking about yet

It's also going to give a lot of people the chance to refinance. Of everyone who took a home equity line or loan over the last two years, many of you are sitting at 10%, some 12%, some 8 or 9%. That's much higher-cost money.

People say, Debbie, why would I roll those into one? My first mortgage is at 3%. Well — if your rate is 3% on a $400,000 first mortgage and you have a line or loan for $150,000 or $200,000 at 9, 10, 11, 12%, blending that money together puts you at roughly six and a half or 7% already. So when first-mortgage rates get into the low sixes, high fives, mid fives, combining it all into one is probably less interest paid and a lower total monthly payment.

Start reaching out now if that's on your mind. There's no risk in calling and no risk in applying. First, we'll tell you whether today makes sense. If it doesn't, you go on a list and we call you when your day arrives. If you don't know what number you should be waiting for, and nobody is watching out for you, you'll miss your window.

What Debbie won't write: shared equity agreements

Not everything that came back in 2023 was good. Alongside home equity lines and loans, shared equity agreements had a resurgence. People wanted to tap equity but weren't comfortable taking on any new monthly payment.

I don't write them and I'm not a fan. The one positive is that there's no monthly payment to get the money out. But you're giving up a percentage of the equity in your home. It isn't a normal note where you borrow an amount at a rate with a set payment. As your property appreciates, the amount you owe back when you sell or refinance goes up with it. You're essentially giving somebody partial ownership. If you give up 20% or 30% and your home goes up $50,000, $75,000, $100,000 — and we've seen double-digit appreciation — you're paying back a whole lot more than you ever borrowed.

There is a borrower for every type of loan, and there's probably someone that product fits. But before you do one, call and see whether there's a better option for you.

The credit-score pricing story everyone got wrong

The biggest story of 2023 was Fannie Mae and Freddie Mac changing the pricing adjustments on borrowers with good credit scores. Everybody was up in arms about it.

First, what an LLPA is: a loan-level price adjuster. When I tell you your rate depends on the property type, that's an adjuster. Your credit score, good or bad, is an adjuster. Your loan-to-value — how much you're putting down or how much equity you have — is an adjuster. Whether it's a purchase, a rate-and-term refinance or a cash-out refinance is an adjuster. All of those are LLPAs.

What actually happened was that adjusters were removed for first-time buyers within certain income limits. So if your income wasn't fabulous and your credit wasn't fabulous, you weren't getting hit as hard for the high debt ratio or the lower score — while somebody with great credit, a big down payment and low debt ratios still did great. At least, that's what everybody thought.

Certain news organizations seized the opportunity to criticize the administration, because it appeared that good-credit borrowers were subsidizing riskier borrowers. In truth, the changes had little to no impact on the state of lending in 2023. But there was one important takeaway: the FHFA ended up with egg on its face, and I doubt we'll see anything dramatic in 24 on pricing changes unless it's a positive change for mostly everyone.

They didn't make things worse for someone with great credit and a large down payment — they left that as it was. They tried to make things a little better for someone struggling on credit or income, to help more people become homeowners. It backlashed on them. So we're probably not going to see a major change like that again, because nobody's looking for the bad publicity.

Start six months early

So: 23 was rough. There were resurgences in home equity lines and loans and in shared equity agreements. Digging deeper for first-time buyers in low- to moderate-income areas brought us new loan programs. Rates are starting to come down, applications are starting, and people are getting excited for 2024. We saw a big change in rates just through the month of December — so imagine what happens when the Fed actually announces the first cut.

If your goal this year is to get your debt under control, buy a property, buy a second or third property, do home improvements, or sell and buy another home — do not wait. The one piece of mom advice I can give you is to start the process six months before you're ready to pull the trigger. Know what credit score you're working with, what rate you need to hit the payment you want, how much you need for a down payment, what closing costs look like, and what your options are today.

You can log into an application and stop and start it as many times as you want. It could take you three months to finish it, because we're all busy. There is absolutely no rush. But making that first phone call is the step in the right direction.

Don't be behind the herd. I've been talking about temporary buydowns since 2021, and now suddenly everybody's talking about them. Know in advance what you need. If I told you the rate you needed for a comfortable payment was 5% and we're at 5.25%, start looking now, because it's around the corner. Have your application ready so the minute you see the house you want, or the rate hits your number, all you have to send is: let's go, get me locked.

I'll be back next Wednesday at 1 Pacific on YouTube with everything going on in the mortgage and real estate world. Text the word MOM to 844-935-3634 — that's 844-WE-LEND-4 — to get one text a week when I go live. It's the same number for the office. Happy New Year, everybody. Talk to you all real soon.