With mortgage rates dropping and fee changes in the pipeline, now may be the time to buy that home

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Mortgage rates have hit an 18-week low, giving homebuyers hope for a more affordable loan.

The average rate for a 30-year mortgage dropped to 6.15% last week — the lowest in 18 weeks.

This dip in rates provides welcomed relief for many potential homebuyers who’ve put their dreams on pause thanks to high mortgage interest rates, which have drastically reduced their buying power.

On top of reduced interest rates, the Federal Housing Finance Agency (FHFA) has announced changes to its fee structure beginning May 1, 2023. These changes affect conventional loans and will reduce the cost of a loan for certain borrowers (while increasing it for others).

Plus, according to Redfin, average home prices in the U.S. have continuously dropped, albeit slowly, since hitting their peak in May 2022.

With rates lower than they have been and fee changes coming down the pipeline, it’s a good time to reassess the home-buying plans you may have put on hold and decide if now is the time to act.

Is now a good time to lock-in your mortgage rate?

If a painfully-high interest rate was the only thing holding you back from signing a mortgage, then you may want to jump on today’s (relatively) low rates. The Federal Reserve has been steadily increasing its benchmark Federal Funds rate and has signaled its intent to continue this pattern until inflation is under control. As long as the Federal Funds rate stays high, so will mortgage rates.

The recent dip in rates represents a significant savings for home buyers. Today’s 30-year mortgage rates are currently 0.93% lower than they were last fall, when rates hit 7.08%. For a $500,000 home loan, a 0.93% lower rate saves you $300+ on your monthly payment and over $110,000 in interest over the life of the loan.

To get the lowest interest rate on your mortgage, however, you’ll want to make sure your credit score is as high as possible. This may be the most-important step you can take when trying to get the best terms on a mortgage.

But before committing to buying a home, you’ll need to save up money for a down payment and closing costs. These upfront costs can easily add up to 10%- 20% of the home’s purchase price. On top of that, it’s a good idea to have money set aside for maintenance, repairs and moving costs. You’ll need to make sure you have enough money saved up before starting your home search.

One way you can reduce some of the upfront costs of buying a home is to compare offers from lenders that don’t charge origination fees. Here are some of the best lenders with no origination fees according to our rankings:

How will the upcoming fee changes impact me?

The upcoming FHFA fee changes affect conforming conventional loans, which can be sold to Fannie Mae or Freddie Mac by lenders. More niche mortgages, such as jumbo loans, FHA loans and VA loans will not be affected by these changes.

The specific fees that are changing are known as Loan Level Price Adjustments (LLPAs), which are risk-based fees applied to loans. Lenders base these fees on factors such as the borrower’s credit score, the loan-to-value ratio (LTV) and the type of mortgage. In general, you’ll pay more if your credit score is lower or if you’re borrowing a higher percentage of the property’s value (i.e. higher LTV).

The future fee changes will add an additional layer of complexity to a process that already causes heads to spin. For example, the LLPAs for a purchase mortgage will drop for some borrowers with lower credit scores, while borrowers with higher credit scores could be paying more in certain circumstances.

Given the amount of nuance with LLPAs, it’s important to have a conversation with your lender (or multiple lenders) to see how the upcoming changes could affect your home loan. Keep in mind that although the changes apply to loans sold to Fannie Mae or Freddie Mac from May 1, 2023, lenders will begin adjusting their fees well before that deadline.

You can see the current fees here and the upcoming fee structures here.

Bottom line

Mortgage rates have dipped in recent weeks, which can help make your future mortgage payments more affordable. Just be sure to pay attention to the fees, in addition to the rate, when you are comparing mortgage loan offers.

Also, certain fees associated with conventional loans are changing soon, which could save you money or cost you more depending on your situation. So if you’re in the process of buying a home, talk with your lender to figure out how you’ll be affected.

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