High interest rates have had a significant impact on the mortgage market and their effect is likely to continue as rates continue to increase, the Consumer Financial Protection Bureau (CFPB) said in a report.
Borrowers who got a mortgage in 2022 saw their average monthly payment soar 46% in 2022 and paid more than $2,000 per month, according to the CFPB.
Mortgage rates have increased exponentially since the pandemic and have been teetering from 6% to above 7% since the start of 2023 this year in response to the Federal Reserve's ongoing restrictive monetary policy. The Fed has raised interest rates 11 times since last year to bring inflation down to a 2% target rate. The continued rate increase has triggered a significant jump in mortgage rates, pushing them to their highest level in over two decades.
In addition to rising mortgage rates, borrowers paid more on closing costs and fees, the report said. Over 50% of borrowers paid discount points in 2022. The median borrower paid $2,370 for discount points in 2022, up 32.1% from 2021, the report said. Discount points are an upfront fee a homebuyer pays directly to the lender in exchange for a reduced interest rate. In some instances, lender credits can lower a borrower's closing costs, and the trade-off is accepting a higher interest rate.
"The higher interest rate environment had profound effects on the mortgage market in 2022, with borrowers paying much more in monthly payments," CFPB Director Rohit Chopra said. "These trends are likely to continue given further increases in interest rates in 2023."
Homebuyers can still find the best mortgage rate by shopping around and comparing their options. Credible's free online tool can help you shop around and compare rates with multiple lenders to see your pre-qualified rates in minutes.
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Affordability is the biggest challenge for homebuyers, but inflation and rising costs have also made absorbing other expenses hard for many buyers. Some homeowners may be turning to their homes to deal with rising costs. The CFPB report said that although refinancing was down 73%, most of the loans were cash-out refinancing and home equity loans done by homeowners looking to tap their home equity, in some instances, to pay for big expenses.
"It is possible that homeowners are finding it difficult to move and are using the proceeds from cash-out refinances for renovations and repairs," Chopra said. "However, some may be using these products to pay for higher education or other expenses unrelated to housing."
Home equity values across the nation increased in the second quarter of this year in sync with home prices, according to a recent CoreLogic report. U.S. homeowners with a mortgage saw year-over-year equity losses of $8,300, but quarterly gains added almost $13,900. That means the average homeowner now has about $290,000 in equity. Still, demand for loans tied to a home's equity has dampened as interest rates increased and equity value has dipped, according to a second CoreLogic report.
"Given prolonged high home prices, some owners will likely continue to tap accrued equity if necessary," CoreLogic Principal Economist Archana Pradhan said. "On the other hand, current high interest rates may cause some potential [home equity lines of credit (HELOCs) and home equity loans] borrowers to rethink that decision. If mortgage rates start to fall, demand for HELOCs will likely pick up again."
If you are interested in tapping your home's equity, you could consider taking out a cash-out refinance. Visit Credible to compare multiple mortgage refinance lenders without affecting your credit score.
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Despite the growing costs of homeownership, buyers are still meeting their payment obligations. Late-stage delinquencies remained at a historic low, and the foreclosure inventory rate (the share of mortgages in some stage of the foreclosure process) remained unchanged from the year before at 0.3%, according to CoreLogic.
Higher home equity also means homeowners are better positioned to negotiate if they can't make their mortgage payments. Here's how borrowers can navigate alternatives to foreclosure when faced with financial distress:
Speaking to your lender to work out a repayment plan to get your past-due loan back on track is a good option, but only if it's just a question of a temporary setback.
"Your lender may be willing to work out a plan provided you won't have trouble continuing to make payments going forward," Quicken Loans said in a statement. "As part of this repayment plan, the lender will take the amount you owe in missed payments and add increments of it to your regular monthly payments, allowing you to pay back what you owe over a specified time period."
Homeowners experiencing financial hardship who cannot make monthly payments can ask their mortgage servicer about loan modification options to stop foreclosure. These changes can include extending the loan term to give you more time to pay it off and lowering your monthly payments.
In today's market, many homeowners, including those potentially facing foreclosure, have sufficient equity in their homes that a traditional sale could be a better alternative to foreclosure, according to the CFPB.
The most important thing struggling borrowers can do is take control. The earlier you seek help, the more protections you will have under CFPB rules.
If you want to lower your monthly payment or review your options instead of foreclosure, contact Credible to speak to a home loan expert and get your questions answered.
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