How Attorneys Can Prepare for an Interest Rate Change

Potential home buyers often wait for interest rates to drop before they apply for pre-qualification. Mortgage rates may fall into a normal pattern this year after several years of highs and lows in the housing market. So how can you prepare for an interest rate change?

Attorneys shopping for a new home are able to apply for a “portfolio” loan, a particular type of loan that does not require a third party insurer. Your credit score, income, available cash for down payment, or your debt-to-income ratio can play a role in getting the best possible interest rate for a conventional loan. But mortgage lenders have some degree of flexibility in loan approval. Attorney Mortgage offers a loan package that caters to attorneys and optimizes your individual circumstances.

How Do Portfolio Loans Help Newly-degreed Attorneys?

Portfolio loans offered by Attorney Mortgage sometimes offer low to no down payment requirements, compared to conventional mortgages that ask for 5% or more of the loan amount. Portfolio loans do not have a loan insurer as a part of the loan process – the banks are the insurers themselves.

Newly degreed attorneys often have low income and carry a large amount of student debt. Some state bonds programs are available for attorneys, but terms are generally not favorable. A portfolio loan minimizes the requirements, usually eliminating private mortgage insurance, reducing the amount of down payment, excluding student debt from calculations, and including a marketable interest rate. 

How Does the Federal Interest Rate Affect My Mortgage?

Lower interest rates could reduce your monthly home mortgage payments, but simply watching interest rates is not enough. In fact, it may not matter as much as you think.

In 2023, interest rates hit 8% in some areas of the country. Many existing homeowners decided to stay in their homes, because moving would require a new home loan with a higher rate. In 2024, rates have gone down by approximately 1%, and at the time of this writing rates were hovering around 6.6%. 

The federal interest rate is the rate at which banks borrow money from the Central Bank. Programs such as Fannie Mae or Freddie Mac must obtain money to lend. So they attract investors by offering them mortgage-backed securities. Mortgage-backed securities are much like treasuries and are a solid investment, especially when the economy slows. However, they don’t have a very high yield. 

If an investor is able to yield gains of 10% or more from stocks, they will often ignore mortgage-backed securities as a lower-risk, lower return option. So federal interest rates are raised to become more attractive to investors. In effect, if investors aren’t buying mortgage-backed securities, interest rates rise. If they are buying them, the rates go down.

Often, the federal rate is already predicted months in advance. If there is a rumor that fed rates might move by a fraction of a percent, investors will move on the rumor, causing increases or decreases months in advance. 

Other factors that play into investors decisions are the jobs market, inflation, and the consumer price index.

The Consumer Price Index

The Consumer Price Index (CPI) is a measurement of change in consumer prices on a monthly basis. The Bureau of Labor Statistics calculate the CPI, and it is used to measure inflation and deflation. 

The CPI is used by the Federal Reserve to determine economic policy. The Fed can stimulate the economy or slow it if it is growing too fast. The measures also trickle down to businesses and individual consumers, and it can factor into pay as well as overall spending. Mortgage rates can be impacted as CPI increases.

Because industry-specific mortgages are typically funded by banks, the federal interest rate does not have as large a role in how a the loan can be framed. And a home buyer should consider the possibility of home prices rising in the future. 

The number of homes for sale has increased in the last few months, but the overall number is still well below pre-pandemic numbers. The supply of homes does not balance with the demand, and that can affect pricing. 

Buying Now – Or Later? 

Property values increased by an average of 6.8% in 2023 according to Mortgage Reports. If you wait a year for rates to decrease that same home you wanted to buy will become more expensive. If home value appreciation stays at the same rate as in 2023 you would pay an extra $34,000 on a $500,000 purchase. Compare if you purchased that home at a $500k purchase price but with a 1% higher interest rate you would pay an extra $5,171 in interest. The question is would you rather pay $34,000 more for a home or $5,171 in extra interest. It is widely considered that in 2024 interest rates will decrease substantially. So, the best solution may often be to purchase the home you want now with a loan at the higher interest rate, and refinance when rates go down in the future. 

Purchasing a home for the first time can be challenging but rewarding. If you are a newly degreed attorney, an established attorney looking for a home, or if you are ready to re-finance your home, Attorney Mortgage is here to help you navigate the loan process. Contact us or call (816) 379-6264.