Thanks to skyrocketing housing prices, homeowners are now sitting on nearly $30 trillion in home equity, according to the St. Louis Federal Reserve — just shy of the 2022 peak.
That’s roughly $200,000 cash per homeowner in equity that can be tapped, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home as a cushion.
Up until last year, taking cash out by refinancing was a popular way to access the equity you’ve accumulated in your home. With mortgage rates currently over 7%, that’s suddenly a lot less appealing.
Even with high rates of home equity, borrowers are more likely to take out a second loan to pull cash out, rather than lose their low rate through a cash-out refi.
Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit, but with better rates than a credit card, that you can use when you want to, or just have on hand.
Last year, originations of home equity loans and HELOCs increased 50% compared with two years earlier, according to the Mortgage Bankers Association, or MBA.
“Given the nearly $30 trillion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.
When it comes to borrowing against your home, the terms can vary greatly, according to a LendingTree report that analyzed more than 580,000 home equity loan offers across the country.
The average home equity loan amount offered to homeowners is $104,102, LendingTree found. Homes in Iowa had the most favorable terms with an average interest rate of 9.88% — two percentage points higher than the average rate of 7.88% offered in Maryland, the lowest in the nation.
Still, at less than 10%, rates are significantly lower than what it costs to borrow on credit cards, which charge roughly 20%, on average.
However, “it’s not that easy to withdraw money from your home,” said Zillow’s senior economist, Nicole Bachaud. “Not everybody is going to qualify for getting an extra loan.”
Fewer banks offered this option during the height of the Covid pandemic, when lenders tightened their standards to reduce their risk. Access to HELOCs has improved, although the most preferable terms still go to borrowers with higher credit scores and lower debt-to-income ratios.
“Though a home equity loan can be a good way to pay for big expenses, like major renovations, or to consolidate high-interest debt, getting one isn’t without drawback,” added Jacob Channel, LendingTree’s senior economist.
“Not only can qualifying for a home equity loan be more challenging than qualifying for other types of debt, defaulting on a home equity loan can have serious negative consequences,” Channel said. In some extreme instances, defaulting on a home equity loan can mean that you’ll lose your house, he noted.
Even now, “borrowers shouldn’t rush out to get a home equity loan until they fully understand all of the risks associated with them,” Channel cautioned.
Keep in mind that different lenders will also offer different terms and interest rates, Bachaud added. She recommended talking to several mortgage companies or loan officers, as well as weighing all the costs before deciding what makes the most sense.
More couples are becoming homeowners before tying the knot.
Unmarried couples make up 18% of all first-time homebuyers, up from just 4% in 1985, according to a 2022 report by the National Association of Realtors.
The organization mailed out a survey in July 2022 and received a total of 4,854 responses from homebuyers who bought a primary residence between July 2021 and June 2022.
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“Unmarried couples have been on the rise [as homebuyers] and now they’re at the highest point that we’ve recorded,” said Jessica Lautz, the Washington, D.C.-based vice president of research of the National Association of Realtors.
Buying a house is a bigger commitment than renting, so while these couples may be eager to own a home, there are a few things they should consider before purchasing a property together.
Many young, unmarried couples live together, often for financial reasons. About 3 in 5 unmarried couples in the U.S. live with their partners, according to a report by the Thriving Center of Psychology.
Splitting the cost of housing, which can be a big part of your budget, makes sense.
Even so, unlike married homebuyers, almost half of unmarried ones — 46% — made financial sacrifices, including picking up secondary jobs, to finance their purchase, the NAR report found.
“Housing affordability really is a struggle, so pulling your finances together as an unmarried couple can make a lot of sense to move forward on that transaction,” said Lautz, who is also the deputy chief economist of NAR.
The typical unmarried couple buying a home together for the first time was roughly 32-year-old millennials with a combined average household income of $72,500, according toLautz. Additionally, these shoppers were more likely than married couples to receive loans — 4% versus 3% — or be gifted money from friends and family — 12% versus 7%.
One reason unmarried people may decide to buy homes with their partners is the strength in numbers that pairing up offers when it comes to qualifying for financing, as real estate prices and interest rates remain high, said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
While one could argue couples should simply get married if they’re already investing in a house, some people may opt to keep things, such as their estates, separate.
“There are reasons why people don’t get married; it’s not an automatic given these days,” Cohn noted.
But unmarried couples should carefully approach making a commitment of this scale.
There are often no legal protections they can fall back on, said Cohn. If one person decides to leave, the other can be saddled with the entire mortgage and may not be able to afford it, she said.
“In order to walk away from a marriage, you have to get divorced, so there’s more staying power,” Cohn said. “If you’re an unmarried couple, you have no legal obligation to that other party.”
However, it is counterintuitive for just about anyone to stop making mortgage payments — because it will ruin their credit, she added.
To protect their investments in the property, unmarried couples ought to carefully consider how it is titled. That helps lay out each partner’s legal rights and ownership, as well as what happens to the home if one of them dies.
Talk to an attorney about your options. Those options might include titling the property as joint tenancy with rights of survivorship, if ownership is equal, or as tenancy in common if one partner is contributing more financially.
Couples might also consider using a limited liability corporation or other entity, Cohn suggested. “By taking title in an entity like an LLC or partnership, you can better spell out and define who’s responsible for what portion,” she said.
They can also protect their share of investments by outlining them in a property agreement. It defines who’s responsible for the mortgage, how much each person is putting into the down payment, who’s paying for the insurance and home repairs, added Cohn.
This may be a good idea if one person has a higher income than the other, she added.
1. Carefully weigh tapping into retirement accounts for a down payment: While it’s generally not the best idea to pull from retirement funds, millennials still have years to recover, said Curtis, who is also a CNBC Financial Advisor Council member. “The reality is, for most millennials, this is where most saving happens.”
Funds in a traditional IRA can be used for a first-time home purchase, up to the lifetime limit of $10,000. The amount will be taxed at ordinary rates in the year withdrawn but will not incur a 10% penalty if it is a first-time home purchase, said Curtis.
Roth IRAs can be accessed as well, but the rules must be followed closely, said Curtis. You can typically withdraw contributions at any time without incurring taxes or penalties, but there are age and time requirements for withdrawn investments to count as a qualified distribution.
Many companies allow employees to borrow from their 401(k) plans. An employee can borrow 50% of their invested balance, up to a maximum of $50,000. “If a person has $100,000 or more, they can borrow $50,000,” said Curtis. “If they only have $70,000, they can borrow up to $35,000.”
Loans must be paid back over five years or in full if employment ends.
2. Review credit reports and scores to ensure you get the best mortgage rate possible: Make sure there are no inaccuracies, diligently pay your bills on time and reduce your debt levels as much as possible before the purchase. Keep in mind that lenders will look at both partners’ scores if both are on the mortgage application.
3. Keep credit activity low: Avoid making any large purchases on credit cards, as well as opening or closing new lines of credit as any of these could affect your credit score.
4. Save money in a high-yield savings account: Instead of keeping your down payment savings in the stock market, consider using a high-yield savings account. “The market could dip right when the cash is needed,” added Curtis. “Fortunately, rates are very good right now.”
After rising steadily since January, home prices may now be turning lower again.
The latest read on home prices shows they hit another all-time high in July, rising 2.3% from the same month last year, according to Black Knight. That’s a bigger annual gain than the roughly 1% recorded in June, and August’s annual comparison will likely be even larger because prices began falling hard last August.
But prices weakened month to month, according to Black Knight. While still gaining, which they usually do at this time of year, the gains fell below their 25-year average. This after significantly outdoing their historical averages from February through June. It’s a signal that a slowdown in prices may be underway again.
“In addition to monthly gains slowing below long-term averages, Black Knight rate lock and sales transaction data also points to lower average purchase prices and seasonally adjusted price per square foot among recent sales,” said Andy Walden, vice president of enterprise research at Black Knight. “All of these factors combined underscore the need to focus on seasonally adjusted month-over-month movements rather than simply relying on the traditional annual home price growth rate.”
Behind the cooling off: mortgage rates. They rose sharply last summer and fall, causing prices to drop. They then came down for much of the winter and a bit of the spring, causing home prices to turn higher again. Now rates are back over 7% again, hitting 20-year-plus highs in August.
Add to that, new listings rose from July to August, atypical for that period of the year. Some sellers may be trying to cash in on these historically high prices. Active inventory, however, is about 48% below the levels seen from 2017 to 2019.
“While the uptick in new listings is good news for home shoppers, inventory remains persistently low, even with record-high mortgage rates putting a damper on demand,” said Danielle Hale, chief economist for Realtor.com.
A drop in prices would come as some relief to buyers, but unlikely enough.
The jump in home prices since the start of the Covid pandemic, combined with much higher mortgage rates has crushed affordability.
It now takes roughly 38% of the median household income to make the monthly payment on the median-priced home purchase, according to Black Knight. That makes homeownership the least affordable it’s been since 1984.
Indeed, everyday home expenses, including utility bills, property taxes, insurance and home maintenance, cost the average homeowner $14,155 a year, not countingthe typical mortgage payment, according to a June report from Zillow and Thumbtack.
Many homebuyers just focus on the principal and interest of their mortgage payment, said certified financial planner Vince Darling at the Stonebridge Group in Forest Lake, Minnesota. “This can lead people to penny-pinch once they move into a new home.”
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Here are three of the most common surprise homeownership expenses and how to prepare for each one, according to experts.
As a first-time homebuyer, it’s easy to overlook property taxes since you’ve never paid those levies directly. Rates often vary widely by city or county, making it harder to plan for the bill.
Based on your home’s assessed value, it’s important to know which jurisdictions levy the taxes and how often reassessments happen, said Richard Auxier, senior policy associate at the Urban-Brookings Tax Policy Center. “A good person to call up would be the local representative,” he suggested.
Another major expense can be homeowners insurance, with an average yearly premium of $1,428 for $250,000 in dwelling coverage, according to Bankrate.
However, it can be significantly higher in disaster-prone areas, said CFP Kevin Brady, vice president at Wealthspire Advisors in New York. These policies may not cover key weather events, so check your coverage carefully, he said.
Typically, you’ll need separate policies for floods and earthquakes. You may face a separate deductible and provisions for hurricanes and other windstorms.
With premiums on the rise, you may start shopping for a policy and gathering quotes before putting in a home purchase offer.
The cost of home repairs and maintenance can also be a hidden expense for first-time homebuyers.
Annual maintenance costs soared to an all-time high during the second quarter of 2023, reaching $6,493, compared with —$5,984 one year prior, according to Thumbtack.
While a good home inspector can prepare prospective buyers by sharing the condition of a roof or major systems that typically need replacing at set intervals, many experts recommend extra savings for inevitable expenses.
As a first-time homebuyer, you need to make sure you have a sufficient cushion for surprises — I’d argue 5% of the home’s purchase price at least.
Nicole Sullivan
Co-founder of Prism Planning Partners
“As a first-time homebuyer, you need to make sure you have a sufficient cushion for surprises — I’d argue 5% of the home’s purchase price at least,” said Nicole Sullivan, a Libertyville, Illinois-based CFP and co-founder of Prism Planning Partners.
“Be aware that anything that comes up on the home inspection will need to be addressed and could happen sooner rather than later,” she added.
Spencer Rascoff, Zillow Co-Founder and Pacaso Co-Founder, joins ‘Closing Bell Overtime’ to talk the housing market, Pacaso’s business model, mortgage rates and more.
Ian Shepherdson, Pantheon Macroeconomic founder and chief economist, joins ‘Squawk Box’ to discuss the state of housing availability & affordability, why he sees no inflation threat from housing for the foreseeable future, and more.
Orphe Divounguy, Zillow home loans senior economist, joins ‘The Exchange’ to discuss America’s housing affordability crisis, Zillow offering a one percent down payment loan program in Arizona, Zillow’s plan to roll out the home loan plan beyond Arizona.
Vishal Garg, Better.com founder & CEO, joins 'Squawk Box' to discuss the company going public on the Nasdaq via a SPAC merger with Aurora Acquisition Corp., the mortgage lender's rough road to debut amidst layoffs, losses and SEC probe, the mortgage business at large, and more.
A For Sale sign displayed in front of a home on February 22, 2023 in Miami, Florida.
Joe Raedle | Getty Images
Mortgage rates jumped Monday, following a rise in bond yields driven by investors’ concerns that high interest rates and inflation will linger longer than expected.
The average rate on the popular 30-year fixed mortgage hit 7.48%, the highest level since November 2000, according to Mortgage News Daily. It has risen 29 basis points in just the past week.
“Investors just aren’t seeing the kind of deterioration in economic data that they expected,” said Matthew Graham, chief operating officer of Mortgage News Daily.
He noted that the Federal Reserve wants to see the same deterioration before considering a policy shift, and that shift would likely favor short-term rates first.
“The net effect is that longer-term rates like 10-year Treasury yields and mortgages are bearing the brunt of the market’s negative rate sentiment. This won’t change until the data forces the Fed to start talking about the first rate cut.”
Higher rates are hitting potential homebuyers hard, adding insult to the injury of Covid pandemic-inflated home prices. Rates set more than a dozen record lows in 2020, setting off a homebuying spree that caused prices to rise over 40% from the start of the pandemic to the summer of 2022. Prices pulled back slightly at the end of last year but are now increasing again due to still-strong demand and very lean supply.
Higher mortgage rates exacerbate the supply situation. Current homeowners are reluctant to list their homes for sale because the vast majority of them have rates around or below 3%. To move to another home would mean more than doubling that rate. It has created what is now being called “golden handcuffs” among potential sellers.
For a buyer today, the difference in affordability from just a year ago is dramatic. The average on the 30-year fixed last year at this time was around 5.5%. For someone buying a $400,000 home, with 20% down on a 30-year fixed loan, the monthly payment today, with principal and interest, is roughly $420 more than it would have been a year ago.
More borrowers are now opting for adjustable-rate loans, which offer lower interest rates for shorter fixed terms. The average rate on a 5-year ARM last week was 6.2%, according to the Mortgage Bankers Association. The ARM share of applications rose to 7%. In 2020, when the 30-year fixed was setting multiple record lows, that share was less than 2%.
The nation’s homebuilders have been trying to offset higher mortgage rates by either buying down those rates for short or long terms, or by lowering home prices. They had slowed those incentives earlier this year, as demand surged and rates fell back, but they recently ramped them up again.
Homebuilder sentiment in August, however, dropped sharply, with builders citing higher interest rates as the main reason.
Logan Mohtashami, HousingWire lead analyst, joins ‘Squawk Box’ to discuss skyrocketing mortgage rates, after the National Association of Realtors warned rates could hit 8% if the economy continues to show strength and the Fed hikes rates again, the impact on the housing industry, and more.
Key findings about discrimination in home valuations are under dispute. That hasn’t stopped them from informing policy decisions.
During the past two years, regulators and lawmakers have introduced and adopted new rules and guidelines aimed at curbing the impacts of racial bias on home valuations. But some appraisers and researchers insist these efforts have been based on faulty data.
Conflicting findings from a pair of non-profit research groups call into question whether or not recent actions will improve financial outcomes for minority homeowners without leading to banks and other mortgage lenders taking on undue risks.
The debate centers on a 2018 report from the Brookings Institution, which found that homes in majority-Black neighborhoods are routinely discounted relative to equivalent properties in areas with little or no Black population, a trend that has exacerbated the country’s racial wealth gap. The study, which adjusts for various home and neighborhood characteristics, found that homes in Black neighborhoods were valued 23% less than homes in other areas.
“We believe anti-Black bias is the reason this undervaluation happens,” the report concludes, “and we hope to better understand the precise beliefs and behaviors that drive this process in future research.”
The study, titled “Devaluation of assets in Black neighborhoods,” has been cited by subsequent reports published by Fannie Mae and Freddie Mac, academics and White House’s Property Appraisal and Valuation Equity, or PAVE, task force, which used the data to inform its March 2022 action plan to address racial bias in home appraisal.
Meanwhile, as the Brookings’ findings proliferated, another set of research — based on the same models and data — has largely gone untouched by policymakers. In 2021, the American Enterprise Institute replicated the Brookings study but applied additional proxies for the socioeconomic status of borrowers.
By simply adding a control for the Equifax credit risk score for borrowers, the AEI research asserts, the average property devaluation for properties in Black neighborhoods falls to 0.3%. The researchers also examined valuation differences between low socioeconomic borrowers and high socioeconomic borrowers in areas that were effectively all white and found that the level of devaluation was equal to and, in some cases, greater than that observed between Black-majority and Black-minority neighborhoods.
“That, to us, really suggests that it cannot be race but it has to be due to other factors — socioeconomic status, in particular — that is driving these differences in home valuation,” said Tobias Peter, one of the two researchers at the AEI Housing Center who critiqued the Brookings study.
Contrasting conclusions
Peter and his co-author, Edward Pinto, who leads the AEI Housing Center, acknowledge that there could be bad actors in the appraisal space who, either intentionally or through negligence, improperly undervalue homes in Black neighborhoods. But, they argue, the issue is not systemic and therefore does not call for the time of sweeping changes that the PAVE task force has requested.
Brookings researchers have refuted the AEI findings, arguing that, among other things, their controls sufficiently rule out socioeconomic differences between borrowers as the cause of valuation differences. They also attribute the different outcomes in the AEI tests to the omission of the very richest and very poorest neighborhoods.
Jonathan Rothwell, one of the three Brookings researchers along with Andre Perry and David Harshbarger, said the conclusion reached by AEI’s researchers ignored the well documented history of racial bias in housing.
“No matter how nuanced and compelling the research is, no one can publish anything about racial bias in housing markets, without our friends Peter and Pinto insisting there is no racial bias in housing markets,” Rothwell said. “Everyone agrees that there used to be racial bias in housing markets. I don’t know when it expired.”
Mark A. Willis, a senior policy fellow at New York University’s Furman Center for Real Estate and Urban Policy, said the source of the two sets of findings might have contributed to the response each has seen. While both organizations are non-partisan, AEI, which leans more conservative, is seen as having a defined agenda, while the centrist Brookings enjoys a more neutral reputation.
Still, Willis — who is familiar with both studies but has not tested their findings — said while the Brookings report notes legitimate disparities between communities, the AEI findings demonstrate that such differences cannot solely be attributed to racial discrimination.
“The real issue here is there are differences across neighborhoods in the value of buildings that visibly look alike, maybe even technically the neighborhood characteristics look alike, but aren’t valued the same way in the market,” Willis said. “Whatever that variable is, Brookings hasn’t necessarily found that there’s bias in addition to all of the other real differences between neighborhoods.”
Setting the course or getting off track?
The two sets of findings have become endemic to the competing views of home appraisers that have emerged in recent years. On one side, those in favor of reforming the home buying process — including fair housing and racial justice advocates, along with emerging disruptors from the tech world — point to the Brookings report as a seminal moment in the current push to root out discriminatory practices on a broad scale.
“It’s been really helpful in driving the conversation forward, to help us better define what is bias and be specific about how we communicate about it, because there’s a number of different types of bias potentially in the housing process,” Kenon Chen, founder of the tech-focused appraisal management company Clear Capital, said. “That report really … did a good job of highlighting systemic concerns and how, as an industry, we can start to take a look at some of the things that are historical.”
Appraisers, meanwhile, say the Brookings findings made them a scapegoat for issues that extend beyond their remit and set them on course for enhanced regulatory scrutiny.
“What’s causing the racial wealth gap is not 80,000 rogue appraisers who are a bunch of racists and are going out and undervaluing homes based on the race of the homeowner or the buyer, but rather it’s a deeply rooted socioeconomic issue and it has everything to do with buying power and and socioeconomic status,” Jeremy Bagott, a California-based appraiser, said. “It’s not a problem that appraisers are responsible for; we’re just providing the message about the reality in the market.”
Responses to the Brookings study and other related findings include supervisory guidelines around the handling of algorithmic appraisal tools, efforts to reduce barriers to entry into the appraisal profession and greater data transparency around home valuation across census tracts.
But appraisers say other initiatives — including what some see as a lowering of the threshold for challenging an appraisal — will make it harder for them to perform their key duty of ensuring banks do not overextend themselves based on inflated asset prices.
Even those who favor reform within the profession have taken issue with the Brookings’ findings. Jonathan Miller, a New York-based appraiser who has deep concerns about the lack of diversity with the field — which is more than 90% white, mostly male and aging rapidly — said using the study as a basis for policy change put the government on the wrong track.
“There’s something wrong in the appraisal profession, and it’s that minorities are not even close to being fairly represented, but the Brookings study doesn’t connect to the appraisal industry at all,” Miller said. “Yet, that is the linchpin that began this movement. … I’m in favor of more diversity, but the Brookings’ findings are extremely misleading.”
Willis, who previously led JPMorgan Chase’s community development program, said appraisers are justified in their concerns over new policies, noting this is not the first time the profession has shouldered a heavy blame for systemic failures. The government rolled out new reforms for appraisers following both the savings and loan crisis of the 1980s and the subprime lending crisis of 2007 and 2008.
But, ultimately, Willis added, appraisers have left themselves open to such attacks by allowing bad — either malicious or incompetent — actors to enter their field and failing to diversify their ranks.
“It seems clear that the burden is on the industry to ensure that everybody is up to the same quality level,” he said. “Unless the industry polices itself better and is more diverse, it is going to remain very vulnerable to criticism.”
For many Americans, payday can’t come soon enough. As of June, 61% of adults are living paycheck to paycheck, according to a LendingClub report. In other words, they rely on those regular paychecks to meet essential living expenses, with little to no money left over.
Almost three-quarters, 72%, of Americans say they aren’t financially secure given their current financial standing, and more than a quarter said they will likely never be financially secure, according to a survey by Bankrate.
“There are actually millions of people struggling,” said Ida Rademacher, vice president at the Aspen Institute. “It’s not something that people want to talk about, but if you were in a place where your financial security feels superprecarious, you’re not alone.”
This struggle is nothing new. Principal Financial Group found in 2010 that 75% of workers were concerned about their financial futures. What’s more, since 1979, wages for the bottom 90% of earners had grown just 15%, compared with 138% for the top 1%, according to a 2015 Economic Policy Institute report. But there’s now a renewed focus on wage-earner anxiety amid higher inflation and rising interest rates.
The typical worker takes home $3,308 per month after taxes and benefits, based on the latest data from the U.S. Bureau of Labor Statistics. But when you take a look at the cost of some of the most essential expenses today, it’s easy to see why consumers feel strained.
The median monthly rent in the U.S. was $2,029 as of June, according to Redfin. That amount already accounts for about 61% of the median take-home pay.
Meanwhile, the Council for Community and Economic Research reported that the median mortgage payment for a 2,400–square-foot house was $1,957 per month during the first quarter of 2023, which accounts for about 59% of the median take-home pay.
“Inflation is really hurting individuals having stability in their housing,” said certified financial planner Kamila Elliott, co-founder and CEO of Collective Wealth Partners in Atlanta. She is a member of CNBC’s Financial Advisor Council. “If you have uncertainty in your housing, it causes uncertainty everywhere.”
Combine that with the average $690.75 Americans spend each month on food and out-of-pocket health expenditures that cost the average American $96.42 monthly, and you get a total expense of $2,816.17 for renters and $2,744.17 for homeowners.
That amount already accounts for just over 85% of the median take-home pay for average American renters and almost 83% for an average homeowner. This is excluding other essential expenses such as transportation, child care and debt payments.
“So much of managing your financial life in America today is like drinking from a firehose that many households are not able to show up and impose a framework of their own design onto their finances,” said Rademacher. “Many are still in this reactionary space where they’re just trying to figure out how to make ends meet.”
Watch the video to learn more about why financial security feels so impossible in the U.S. today.
Swiss bank UBS agreed to pay a combined $1.4 billion in civil penalties over fraud and misconduct in its offering of mortgage backed securities dating back to the global financial crisis, federal prosecutors announced Monday.
The bank, in its own statement Monday, described the settlement as dealing with a “legacy matter” dating from 2006 to 2007, leading up to the financial crisis.
The settlement concludes the final case brought by the Justice Department against a number of the largest financial institutions over misleading statements made to the purchasers of those mortgage backed securities. The cumulative recoveries in the cases now total $36 billion, according to the Justice Department.
In the years leading up to the financial crisis, investment banks packaged, securitized and sold bundles of mortgages to institutional buyers. Those securities were rated and graded according to quality, with various “tranches” of mortgages hypothetically safeguarding against the risk of complete default.
But unbeknownst to the buyers, those mortgages were not as high-quality as their ratings suggested. UBS, like other banks who settled with the Justice Department, were aware that the mortgages underneath the mortgage-backed securities didn’t comply with underwriting standards.
UBS conducted “extensive” due diligence on the underlying loans before it created and sold the securities to its clients, prosecutors alleged, and despite knowing of the significant issues with the products, continued to sell them to financial success.
The Justice Department has secured settlements with 18 other financial institutions over mortgage-backed security issues, including Bank of America, Citigroup, General Electric, Goldman Sachs, JPMorgan, and Wells Fargo.
Credit Suisse, the defunct Swiss bank now owned by UBS, also settled with the Justice Department over misconduct related to MBS offerings.
A bank capital proposal issued by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency has many in the housing policy community concerned that revised risk weights for bank-held mortgages could further erode banks’ market share in residential mortgages.
Trade groups representing banks and various parts of the mortgage industry have come out against the rules, as have housing affordability advocates. These groups say the impact of the proposed rule changes would be felt by the housing sector more so than the banks themselves.
“In the housing sector, which has just been in a sort of boxing ring getting punched, one after another, and getting exhausted from all that’s coming at them, this one is pretty incredible,” said David Stevens, a long-time mortgage executive who now heads Mountain Lake Consulting in Virginia. “We thought the current Basel rule made sense, but this one’s going to have downstream effects that are going to be very broad in the housing system.”
The change is expected to have at least a moderate impact on banks’ willingness to originate. While banks have been steadily ceding market share to independent mortgage banks and other nonbank lenders since the subprime mortgage crisis, they still play a key role in the so-called jumbo mortgage market, which consists of loans too large to be securitized and sold to the government sponsored enterprises Fannie Mae and Freddie Mac.
“The big, traditional mortgage lending banks have largely exited the field and that’s been going on for some time. This is the next nail in the coffin,” said Edward Pinto, director of the AEI Housing Center at the American Enterprise Institute. “This nail will make it harder for banks to compete with Fannie and Freddie, generally, and then take the one market they’ve had left to themselves, the jumbo market, and make it harder to originate because of the capital requirements.”
Some policy experts say the bigger impacts could come from the second-order effects of the regulation. In particular, they point to the treatment of mortgage servicing assets — the salable right to collect fees for providing day-to-day services to mortgages — as a change that could crimp the flow of credit throughout the housing finance sector and lead to higher costs being passed along to individual households.
“With potential borrowers already facing record high interest rates, steep home prices, and supply-chain issues, increased fees and scarcity of bank lenders could be another brick in the wall stopping Americans from obtaining meaningful homeownership and wealth creation,” said Andy Duane, a lawyer with mortgage-focused law firm Polunsky Beitel Green.
The proposal, put forth by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller on the Currency, notes that the rule change could result in second-order effects on other banks, but it largely focuses on benefits that large banks could enjoy relative to smaller banks as a result of the new rules. It notes that such risks are offset by a requirement that banks adhere to both the new framework and the existing one, to ensure they do not see their regulatory capital levels dip below that of the standardized approach.
Still, the regulators are aware that the change could have unintended consequences on the mortgage industry and housing attainability. Because of this, their proposal includes several questions about the subject.
“We want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers,” Fed Vice Chair for Supervision Michael Barr said while introducing the proposal in an open meeting last month. He added that housing affordability was one of “several areas that I will pay close attention to and encourage thoughtful comments.”
However, the proposal dismissed the idea that the new risk weights on residential mortgages would have a material impact on bank lending in that space. Citing various policy papers, academic studies and regulatory reports, the agencies assert that the risk-weight changes would lead banks adjusting their portfolios “only by a few percentage points.”
Stevens — who served as an assistant secretary in the Department of Housing and Urban Development in the Obama administration, a commissioner for the Federal Housing Administration and president of the Mortgage Bankers Association — said he is not convinced regulators have done sufficient analysis to rule out the type of sweeping, negative implications that he and others fear. He noted that the 1,087-page proposal includes fewer than 20 pages of economic analysis.
“I just don’t think they’ve thought through the downstream effects and the lack of analysis, in terms of actual financial estimates of the implications, is really concerning,” He said. “This will be a really big change, and that’s why you see everybody up in arms and the trade groups aligned against this proposal.”
Like other components of the bank regulators’ Basel III endgame proposal, the components related to mortgages would create standardized capital rules for large banks and do away with the ability for large institutions to use internal models. It also extends these requirements to all banks with more than $100 billion of assets, rather than only the largest, global systemically important banks.
The key provision in the package of proposed rules is the use of loan-to-value, or LTV, ratios to determine risk-weights for residential mortgage exposure.
The change could allow banks to hold less capital against lower LTV mortgages, though there is some skepticism about much of a reduction in capital that change will ultimately entail, especially for GSIBs that previously relied on internal models, said Pete Mills, senior vice president of residential policy for the Mortgage Bankers Association.
“Those risk weights aren’t published, so we don’t know what they are, but they are probably lower than 50% for low-LTV products,” Mills said.
The Basel Committee’s latest regulatory accord, which was finalized in December 2017, envisions LTV ratios as a means of assigning risk weights. But Mills said many in the mortgage banking space were caught off guard by how much further U.S. regulators went beyond their global counterparts. The joint proposal from the Fed, FDIC and OCC calls for a 20 percentage point increase across all LTV bands, meaning while mortgages with LTVs below 50% are assigned a 20% risk-weight under the Basel rule, the U.S. proposal calls for a 40% risk-weight. Similarly, where the Basel framework maxes out at a 70% risk-weight for mortgages with LTVs of 100% or more, the U.S. version has a top weight of 90%.
Under the current rules, most mortgages in the U.S. are assigned a 50% risk weight, so loans with LTVs between 61% and 80% would see their capital treatment stay the same, and any mortgages with LTVs of 60% or lower would see a lower capital requirement. Loans with an LTV of 80% or higher, meanwhile, would likely see a higher capital requirement.
“For GSIBs, that’s probably an increase in capital throughout the LTV rank,” Mills said. “For the rest, it’s a higher risk weight for higher-LTV mortgages and maybe slightly lower in other bands, but, in aggregate, that’s not good for the mortgage market. It’s a higher risk weighting for most mortgages.”
Approximately 25% of first-lien mortgages held by large banks began with an LTV of 80% or higher, according to data compiled by the Federal Reserve Bank of Philadelphia. Roughly 10% have an LTV of 90% or higher, while half were 70% or lower.
Mark Calabria, former head of the Federal Housing Finance Agency, said he is not surprised by the proposed treatment of mortgages, calling it a “natural evolution” of where regulators have been moving. He added that some elements of the proposal resemble changes he oversaw at Fannie Mae and Freddie Mac in 2020.
Calabria said mortgage risk is an issue in the financial system in need of regulatory reform, but he questions the methods being considered by bank regulators.
“I worry that they’re making the problem in the system worse by driving this risk off the balance sheets of depositories, which is probably actually where it should be in the first place,” he said. “I’m not opposed to them tinkering in this space they just need to be more holistic about it.”
The proposal also notes that the new treatment of residential mortgages is aimed at preventing large banks from having an unfair advantage over smaller competitors.
“Without the adjustment relative to Basel III risk weights in this proposal, marginal funding costs on residential real estate and retail credit exposures for many large banking organizations could have been substantially lower than for smaller organizations not subject to the proposal,” the document notes. “Though the larger organizations would have still been subject to higher overall capital requirements, the lower marginal funding costs could have created a competitive disadvantage for smaller firms.”
Yet, while regulators say the proposed rules promote a level playing field, some see it giving an unfair advantage to government-backed lenders.
Pinto sees the proposal as a continuation of a decades-long trend of federal regulators putting private lenders at a disadvantage to the governmental and quasi-governmental entities. He noted that if securities from Fannie and Freddie and loans backed by the FHA and Department of Veterans Affairs, which tend to have very high LTVs, are not given the same capital treatment as private-label mortgages, the net result will be the government playing an even larger role in the mortgage market that it already plays.
Pinto said despite these government programs targeting improved affordability, their provision of easy credit only drives up the cost of housing even further. He added that he hopes regulators reverse course on their treatment of mortgages in their final rule.
“They should just back off on this entirely. It’s inappropriate,” Pinto said. “They need to look at the overall impact they’re having on the mortgage market, and the housing and the finance market, and the role of the federal government, and the fact that the federal government is getting larger and larger in its role, which is inappropriate.”
The other concern is a lower cap on mortgage servicing assets that can be reflected in a bank’s regulatory capital. The proposal would see the cap changed from 25% of Common Equity Tier 1 capital to 10%.
Mills said the capital charge for mortgage servicing rights is already “punitive” at a risk weight of 250%. By lowering the cap, he said, banks will be forced to hold an additional dollar of capital for every dollar of exposure beyond that cap. He noted that regulators had raised the cap to 25% five years ago for banks with between $100 billion and $250 billion of assets to provide some relief to large regional banks interested in that market.
If the cap is lowered, Mills said banks will be inclined to shed assets and shy away from mortgage servicing assets. Such moves would force pricing on servicing rights broadly, a trend that would ultimately lead to higher costs for borrowers.
“MSRs are going to be sold into a less liquid, less deep market, and there are consumer impacts here because MSR premiums are embedded in every mortgage note interest rate,” Mills said. “If MSR values are impacted by this significantly, that rolls downhill through the system. An opportunistic buyer might be able to buy rights at a depressed value, but that depressed value flows through to the consumer in the form of a higher interest rate.”
The proposal will be open to public comment through the end of November, after which regulators will review the input and incorporate elements of it into a final rule. Between the questions raised in the proposal, the acknowledgement by Fed and FDIC officials that the changes could hurt housing affordability, and the strong negative response to the proposal, there is optimism that the ultimate treatment of residential mortgages will be less impactful.
“Nobody seems to be pushing for this, and nobody other than the Fed seems to like it,” Calabria said. “If I was a betting man, it’s hard for me to believe that this is finalized the way it is now in terms of mortgages.”
Home prices are on a tear again across much of the nation after falling for much of last year. That means giving back to homeowners the equity they lost.
Home prices in June hit record highs in 60% of U.S. markets, according to a new report from Black Knight, set to be released Monday. Its national home price index hit a new high in June, up 0.8% from June of last year — a stronger annual growth rate than May.
Nearly every major market saw gains month to month, with the overall index gaining 0.67% from May to June.
Home prices are rising again, because there is far too little supply to meet the current demand. Higher mortgage rates have been a huge deterrent for current homeowners to list their homes for sale because they don’t want to trade up to these higher rates on another purchase.
That home price growth has made homeowners wealthier again. Home equity levels are now back to within 3% of last year’s peaks.
Total equity hit over $16 trillion with tappable equity, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home, rising to $10.5 trillion, just 4% off its 2022 peak. Per homeowner, that is roughly $200,000 in cash sitting in the house, ready for the taking.
As a result, negative equity, or so-called underwater borrowers, are nearly nonexistent in today’s market. Just 344,000 homeowners currently owe more on their homes than the properties are worth.
While that number is a 70% jump from this time last year, according to Andy Walden, Black Knight’s vice president of enterprise research strategy, “everything is relative.”
“There are less than half as many underwater homeowners than there were in 2019 before the onset of the pandemic, with only 3.9% having less than 10% equity, down from 6.6% in 2019,” Walden said.
Of course, all of this virtually destroys home affordability for today’s potential buyers: Affordability stands at a 37-year low.
As a comparison, current homeowners, most of whom carry mortgages with rates between 3% and 4%, need just 21% of the median household income to make the average monthly mortgage payment — principal and interest. Prospective homebuyers today are looking at paying more than 36% of their income on that payment thanks to higher home prices and higher rates.
The average rate on the popular 30-year fixed mortgage hit 7.2% on Thursday, according to Mortgage News Daily. Just two years ago it was around 3%.
“The small relative share of income needed for existing homeowners to meet their mortgage obligations, along with the strong credit quality of today’s mortgage holders and an acute focus on loss mitigation by the industry at large, are all contributing to today’s 16-year low in seriously delinquent mortgages,” Walden said.
Correction: Just 344,000 homeowners currently owe more on their homes than the properties are worth. An earlier version misstated the number.
International buyers are pulling back from the U.S. housing market, as high mortgage rates, soaring home prices, a meager supply of homes for sale and a strong dollar all make the purchases much less financially attractive.
From April of last year to this March, international buyers bought roughly 84,600 homes; that’s the lowest number since the National Association of Realtors began tracking such purchases in 2009 and a 14% drop from the year before.
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And while overseas buyers bought fewer homes, they paid more for them. The median price of homes they purchased was $396,400, the highest the Realtors ever recorded.
China, Mexico, Canada, India and Colombia were the top five countries of origin for international buyers of existing homes by number of houses, not dollar volume. The survey does not count new construction, where international buyers are also active.
Chinese buyers had the highest average purchase price, at $1.23 million, likely because a third of them bought in California, where home prices are highest. In total, 15% of foreign buyers bought homes worth more than $1 million.
“Home purchases from Chinese buyers increased after China relaxed the world’s strictest pandemic lockdown policy, while buyers from India were helped by the country’s strong GDP growth,” said Lawrence Yun, NAR’s chief economist, in a press release. “A stronger Mexican peso against the U.S. dollar likely contributed to the rise in sales from Mexican buyers.”
While foreign sales dropped overall, Chinese purchases did make sizable gains. The total of 2023 Chinese home purchases is the highest since 2018, which was one of the peak years for Chinese international property purchasing, according to Juwai IQI, an Asia-based international real estate technology group.
“Only about one in every 10 Chinese buyers is purchasing purely as an investment, which is a big change from the mid-2010s, when wealthy Chinese consumers looked to diversify their wealth out of China,” said Kashif Ansari, Juwai IQI co-founder and group CEO. “In 2023, the typical Chinese buyer is no longer an offshore investor but is on their way towards becoming an American resident and citizen.”
Foreign buyers continue to flock to the same places as they have in the past, namely Florida (23%), California (12%), Texas (12%), North Carolina (4%), Arizona (4%) and Illinois (4%). Chinese buyers in particular like California, as they often buy so that their children can attend local schools and universities.
“Florida, Texas and Arizona continue to attract foreign buyers despite the hot weather conditions during the summer and the significant spike in home prices that began a few years ago,” Yun added.
About 42% of foreign buyers used cash. As for why they are buying, half purchased the properties for use as a vacation home, rental property or both, up from 44% the previous year.
The drop in overall foreign purchases is unlikely to ease the competition for domestic buyers, as international buyers only made up a little more than 2% of all buyers. But it could help on the margins in certain local markets favored most by foreign buyers.
Today’s domestic buyers, however, are more concerned with mortgage rates, which are more than twice what they were in the first two years of the pandemic, and with the meager supply of homes for sale.
A ‘For Sale’ sign is posted in front of a single family home on October 27, 2022 in Hollywood, Florida.
Joe Raedle | Getty Images
Mortgage rates have been holding at high levels for several weeks now, and that is taking its toll on homebuyers.
The Mortgage Bankers Association reports the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased last week to 6.93% from 6.87%, with points increasing to 0.68 from 0.65 (including the origination fee) for loans with a 20% down payment. The rate was 5.43% the same week one year ago. Rates have held above 6.5% since the end of May.
Higher rates are hitting already rough affordability hard, and buyers are clearly struggling. Mortgage applications to purchase a home fell 3% last week compared with the previous week, according to the MBA’s seasonally adjusted index. Applications were 26% lower than the same week one year ago.
“The purchase index decreased for the third straight week to its lowest level since the beginning of June,” said Joel Kan, an MBA economist. “The decline in purchase activity was driven mainly by weaker conventional purchase application volume, as limited housing inventory and rates still close to 7% are crimping affordability for many potential homebuyers.”
Applications to refinance a home loan also fell 3% for the week and were 32% lower than the same week one year ago.
Mortgage rates began this week higher and could continue to rise ahead of the all-important monthly employment report expected to be released Friday.
“The bond market is clearly bracing for economically bullish data. If those fears are realized, rates could be at 20-year highs by the end of this week,” said Matthew Graham, chief operating officer at Mortgage News Daily.
The Federal Reserve raised the target federal funds rate by a quarter of a point Wednesday, in its continued effort to tame inflation.
In a move that financial markets had completely priced in, the central bank’s Federal Open Market Committee raised the funds rate to a target range of 5.25% to 5.5%. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.
After holding rates steady at the last meeting, the central bank indicated that the fight to bring down price increases is not over despite recent signs that inflationary pressures are cooling.
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For now, inflation remains above the Fed’s 2% target; however, “it’s entirely possible that this could be the last hike in the cycle,” said Columbia Business School economics professor Brett House.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves affect the borrowing and saving rates consumers see every day.
This hike — now the 11th interest rate increase since March 2022 — will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing, putting more pressure on households in hopes of sidestepping a possible recession.
“The pain that the rate hike has caused for a lot of people isn’t gratuitous,” House said. “Ultimately, this is a trade off in choices between pain now and greater pain later if inflation isn’t brought under control.”
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit within one or two billing cycles.
The average credit card rate is now more than 20% — an all-time high, while balances are higher and nearly half of credit card holders carry credit card debt from month to month, according to a Bankrate report.
Altogether, this rate hike will cost credit card users at least an additional $1.72 billion in interest charges over the next 12 months, according to an analysis by WalletHub.
“It’s still a tremendous opportunity to grab a zero percent balance transfer card,” said Greg McBride, Bankrate’s chief financial analyst. “Those offers are still out there and if you have credit card debt, that is your first step to give yourself a tailwind on a path to debt repayment.”
2. Mortgage rates will stay high
Because 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, homeowners won’t be affected immediately by a rate hike. However, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage currently sits near 7%, according to Freddie Mac.
Since the coming rate hike is largely baked into mortgage rates, homebuyers are going to pay roughly $11,160 more over the life of the loan, assuming a 30-year fixed rate, according to WalletHub’s analysis.
Other home loans are more closely tied to the Fed’s actions. Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 8.58%, the highest in 22 years, according to Bankrate.
3. Car loans are getting more expensive
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.
The average rate on a five-year new car loan is already at 7.2%, the highest in 15 years, according to Edmunds.
The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers.
Ivan Drury
director of insights at Edmunds
Paying an annual percentage rate of 7.2% instead of last year’s 5.2% could cost consumers $2,278 more in interest over the course of a $40,000, 72-month car loan, according to data from Edmunds.
“The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market,” said Ivan Drury, Edmunds’ director of insights.
4. Some student loans are pricier
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But as of July, undergraduate students who take out new direct federal student loans will pay an interest rate of 5.50%, up from 4.99% in the 2022-23 academic year.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. But how much more will vary with the benchmark.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are now at more than 5%, the highest since 2008′s financial crisis, with some short-term certificates of deposit even higher, according to Bankrate.
However, if this is the Fed’s last increase for a while, “you could see yields start to slip,” McBride said. “Now’s a good time to be locking that in.”
Prospective home buyers arrive with a realtor to a house for sale in Dunlap, Illinois.
Daniel Acker | Bloomberg | Getty Images
Mortgage rates didn’t move at all last week, and are still sitting near a recent high. With home prices continuing to rise, that pushed more potential homebuyers to the sidelines.
Total mortgage application volume dropped 1.8% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.
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The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) remained unchanged at 6.87%, with points decreasing to 0.65 from 0.66 (including the origination fee) for loans with a 20% down payment. That rate crossed over 7% a few weeks ago and has yet to retreat much.
As a result, applications for a mortgage to purchase a home dropped 3% for the week and were 23% lower than the same week one year ago, when rates were in the mid 5% range. The decline in purchase activity was driven partly by a 10% drop in FHA applications. The Federal Housing Administration, which offers low down payment loans, is favored by lower-income buyers. Clearly, the market is becoming less and less affordable for them.
“The decrease in FHA purchase applications contributed to an increase in the overall average purchase loan size to $432,700, its highest level since the end of this May,” said Joel Kan, an MBA economist, indicating that more activity is now on the higher end of the market.
Applications to refinance a home loan were essentially flat for the week and 30% lower than the same week one year ago. Most borrowers today carry interest rates far lower than the current rate and would therefore not benefit from a refinance. Those wishing to take cash out of their homes are choosing second, home equity loans rather than lose the rate on their primary loan.
Mortgage rates moved higher to start this week, crossing over 7% Tuesday to 7.04%, according to Mortgage News Daily. Rates will likely move later today, following the latest interest rate decision and press conference at the Federal Reserve. The Fed is widely expected to increase its benchmark interest rate by 0.25%.
“The Fed Funds Rate doesn’t directly dictate mortgage rates. In other words, mortgage rates CAN move lower tomorrow even if the Fed hikes. They can also move higher depending on what [Fed chief Jerome] Powell has to say about the Fed’s policy stance,” wrote Matthew Graham, chief operating officer at Mortgage News Daily..
The Marriner S. Eccles Federal Reserve building in Washington.
Stefani Reynolds/Bloomberg via Getty Images
After a pause last month, experts predict the Federal Reserve likely will raise rates by a quarter of a point at the conclusion of its meeting next week.
Fed officials have pledged not to be complacent about the rising cost of living, repeatedly expressing concern over the impact on American families.
Although inflation has started to cool, it still remains well above the Fed’s 2% target.
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Since March 2022, the central bank has hiked its benchmark rate 10 times to a targeted range of 5%-5.25%, the fastest pace of tightening since the early 1980s.
Most Americans said rising interest rates have hurt their finances in the last year: 77% said they’ve been directly affected by the Fed’s moves, according a report by WalletHub. Roughly 61% said they have taken a financial hit over this time, a separate report from Allianz Life found, while only 38% said they have benefitted from higher interest rates.
“Rising interest rates can sometimes feel like a double-edged sword,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “While savings accounts are earning more interest, it is also more expensive to borrow money for big purchases like a home, and many Americans worry that rising interest rates are a harbinger of a recession.”
Any action by the Fed to raise rates will correspond with a hike in the prime rate, pushing financing costs higher for many types of consumer loans.
Short-term borrowing rates are the first to jump. Already, “the cost of variable rate debt has gone up substantially,” said Columbia Business School economics professor Brett House. And yet, “people continue to consume.”
However, “we are getting closer and closer to the point that those excess savings are going to be exhausted and the effect of those rate hikes may bite quite quickly,” House added.
Here’s a breakdown of five ways another rate increase could impact you, in terms of how it may affect your credit card, car loan, mortgage, student debt and savings deposits.
1. Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit.
The average credit card rate is now more than 20% — an all-time high, while balances are higher and nearly half of credit card holders carry credit card debt from month to month, according to a Bankrate report.
If the Fed announces a 25 basis point hike next week as expected, consumers with credit card debt will spend an additional $1.72 billion on interest this year alone, according to the analysis by WalletHub. Factoring in the previous rate hikes, credit card users will wind up paying around $36 billion in interest over the next 12 months, WalletHub found.
Because 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, homeowners won’t be affected immediately by a rate hike. However, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.78%, according to Freddie Mac.
Since the coming rate hike is largely baked into mortgage rates, homebuyers are going to pay roughly $11,160 more over the life of the loan, assuming a 30-year fixed-rate, according to WalletHub’s analysis.
3. Car loans
Krisanapong Detraphiphat | Moment | Getty Images
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans.
For those planning on purchasing a new car in the next few months, the Fed’s move could push up the average interest rate on a new car loan even more. The average rate on a five-year new car loan is already at 7.2%, the highest in 15 years, according to Edmunds.
Paying an annual percentage rate of 7.2% instead of last year’s 5.2% could cost consumers $2,273 more in interest over the course of a $40,000, 72-month car loan, according to data from Edmunds.
“The double whammy of relentlessly high vehicle pricing and daunting borrowing costs is presenting significant challenges for shoppers in today’s car market,” said Ivan Drury, Edmunds’ director of insights.
4. Student loans
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But as of July, undergraduate students who take out new direct federal student loans will pay an interest rate of 5.50%, up from 4.99% in the 2022-23 academic year.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. But how much more will vary with the benchmark.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are now at more than 5%, the highest since 2008′s financial crisis, with some short-term certificates of deposit even higher, according to Bankrate.
However, if this is the Fed’s last increase for a while, “you could see yields start to slip,” according to Greg McBride, Bankrate’s chief financial analyst. “Now’s a good time to be locking that in.”
