Home Loans in Today's Market

We thought it timely for a review of lending basics in today’s market.  In 2022, we have seen interest rates double, and while that can seem scary, we have the skinny on what you need to know as you consider your home buying options.  

We asked for insights from one of our trusted lending professionals, Zack Tolmie at Citibank.  Here is what Zack wants you to know.

“There are two entities called Fannie Mae and Freddie Mac that set most home lending standards and guidelines. If a loan meets these guidelines, the mortgage loan is considered ‘Conforming’ (it conforms to the guidelines). If it does not, the loan is ‘Non-Conforming.’ 

Generally speaking, a Conforming Loan will be sold to Fannie Mae or Freddie Mac, while a Non-Conforming Loan must remain on the books of the bank that originated the loan.

Until this year, it was generally much less expensive to sell a loan to Fannie Mae or Freddie Mac than it was for a bank to hold a loan on their books. Mortgage rates reflected this, and Conforming rates used to be about the same or lower than Non-Conforming rates.

Earlier this year, the Federal Reserve began increasing the Fed Fund Rate which indirectly increased mortgage rates. The affect on Conforming rates has been stronger than it has on Non-Conforming rates, and for the first time in decades, Conforming rates are significantly higher than Non-Conforming rates, and it is comparatively more expensive for a bank to originate a Conforming Loan than it is a Non-Conforming Loan that they’ll keep on their books.

Most mortgage rates since the Housing Collapse of 2008 have been Fixed rate mortgages. Unlike Fixed rates, Adjustable Rate Mortgages (ARMs) can change after a certain number of years. With ARMs, the rate is only fixed for 3, 5, 7, or 10 years, and then can adjust every six months after that. The rate starts out lower than a comparative Fixed Rate starts, but the rate can change after that introductory time period.

With an ARM, a borrower should EXPECT rates to increase once rates change, and prepare themselves for this change to either:

1. 1. 1. 1. Refinance once the fixed period ends
         2. Pay off the loan when the fixed period ends
         3. Pay off the loan aggressively during the fixed period, so that it is paid off when the fixed period ends
         4. Sell the home (and pay off the loan) when the fixed period ends
         5. Be ok with the higher rate after the fixed period

ARMs can be a good tool for borrowers who expect rates to come down in the future, and who fully understand that the rate can (and will) change.”

Zack Tolmie

Citibank, N.A.

Phone: (212) 559-2666

Email: [email protected]

NMLS Identifier: 761651

A conforming loan size is when you borrow up to $647,200, but it’s on track to go up to $715,000 as of Jan 1, 2023.  So, if you are in a place where you are on the line of a conforming or non-conforming loan size, right now it will potentially benefit you to buy a more expensive apartment and be eligible for lower interest rates on a non-conforming loan.  As of October 10th, here are Citi’s 30-year fixed rates which clearly illustrates this difference:

There are also other ways to save on your interest rate which include buying points to lower your rate, first-time home buyer incentives (most banks consider you a 1st time buyer if you haven’t purchased any homes in the last 3 years, so ask your lender) and relationship banking discounts.

Regardless of interest rates, buying a home is a surefire way to lock in a large part of your monthly budget.  Consider in NYC that rental values are continuing to rise with some tenants experiencing 30% or higher increases year over year.  That’s a HUGE monthly increase to someone’s expenses budget and a tremendous constraint on financial planning.  Locking in your mortgage payment at today’s interest rates also is not forever.  Have you ever heard the phrase “marry your home, but date your interest rate?”  It couldn’t be more true that your interest rate is not permanent.  In the future when you can refinance at a lower rate and reduce your monthly spend, your friends may be buying a home for much higher values.  You can’t reduce what you paid for a home, but you can reduce your monthly housing payment with a lower interest rate as dictated by the market conditions of a particular time.  

Let’s talk about time and value!  We don’t know about you, but 10 years ago we could buy 2 fancy drinks at a nice NYC bar for $25 and now that gets us just about one tasty adult beverage! 

Imagine you buy a 1.5 million dollar 2-bedroom property now that you like.  In 10 years, will you be more upset if:

1) You buy it at today’s interest rates and spend an extra $1,800 a month on your mortgage, which is $216,000 over 10 years. (assuming a 20% down payment)

2) You can no longer buy a 2 bedroom for 1.5M and it now costs 44% more or $2,160,000.  That’s 660k more than it would have cost to buy the same apt 10 years prior.  

In September 2012* the median home price in Manhattan was $816,000. September 2022* it was $1,175,000 or 44% higher. Proving the point that over time how much a dollar buys you changes.  Let’s say someone rents a $6500 2 bedroom for the next 10 years at an average annual increase of 5% per year.  In 10 years the rent will be $10,083 per month and the renter will have given a landlord $981,075 in rent with 0 dollars of that housing payment being reinvested into themselves.  If someone buy that 1.5M two bedroom now (even at today’s rates), then in 10 years the remaining principal balance on the loan will be $985,934 if they don’t refinance.  That means you essentially put 215k towards yourself and your equity vs nothing if you rent.  If they achieve strong equity growth and sell in 10 years for 2.16M then they will have over a million dollars coming back to them (minus closing costs).  That’s not to mention the tax savings of being a homeowner with mortgage interest and property tax write-offs!  So, even with today’s interest rates, how does buying sound now?  We think depending on your personal financial profile with professional support and insights in choosing a property, it’s a really great choice. 

*All median prices sourced from Urban Digs

**all numbers quoted above are projections. We cannot make any accurate predictions about the future.  When it comes to money, please consult with your CPA and/or financial advisor about your personal financial risks and benefits.