Biden Lays Out His Blueprint For Fair Housing
Undoing Trump’s rules on segregation is only the start of what appears to be a slate of equity-focused priorities. Biden Lays Out His Blueprint For Fair Housing
President Joe Biden signed an executive order on Jan. 27 directing his administration to end policies that enable discrimination in housing and lending, and acknowledging the federal government’s role in erecting systemic barriers to fair housing. It’s a blueprint for an agenda aimed at swiftly undoing the controversial efforts of his predecessor.
With the new directives and several recent agency appointments, the full parameters of the new president’s plans are coming into view. Part of a package of White House actions to promote equity, Biden’s executive order tasked the U.S. Department of Housing and Urban Development to review two key rules implemented under the Trump administration.
One of those rules governs how cities assess and enforce efforts to reduce segregation, a Civil Rights-era mandate that Trump repeatedly mischaracterized as an attempt to “abolish the suburbs.” The other rule polices discrimination in rental housing and mortgage lending, standards that were relaxed under former Housing Secretary Ben Carson.
“Housing is a right in America, and homeownership is an essential tool to wealth creation and to be passed down to generations,” Biden said as he signed the order.
Reversing those rules changes — on the “Affirmatively Furthering Fair Housing” policy and the “disparate impact” doctrine — emerged as a high priority for civil rights advocates and housing activists at the very start of the Biden era. The president has ordered incoming Housing Secretary Marcia Fudge to take the steps necessary to align the department’s policies and rules with the broader promise of the Fair Housing Act of 1968.
“If you look right now at the Black homeownership rate, it’s the lowest it’s been in 50 years,” says Maurice Jones, president and chief executive officer for the nonprofit Local Initiatives Support Corporation. “Homeownership is one of the biggest tools we have in catalyzing intergenerational wealth. The federal government has to be a big player in this space to make a difference.”
Biden’s housing agenda goes further than simply unwinding a pair of Trump regulations. The president has pledged federal action to pursue environmental justice, lift restrictions on housing production and ease the racial gap in homeownership and homelessness alike. How far the administration can get toward fulfilling this agenda depends on how successful he will be in overcoming partisan gridlock in the Senate. But several appointments so far point to the president’s priorities.
Rule-making and enforcement may be the only tools that Biden needs to radically change the federal government’s disposition on equity.
For example, to serve as chief of staff at HUD, the administration has tapped Jenn Jones, the former lead on membership and policy at the National Community Reinvestment Coalition, a fair lending nonprofit. Jones previously served as a senior policy advisor under former HUD Secretary Julián Castro, where she led the development of the Obama administration’s Affirmatively Furthering Fair Housing rule and other policy initiatives.
Researchers who have focused on equity as housing issues round out the department’s senior staff: Peggy Bailey, previously the vice president for housing policy at the Center on Budget and Policy Priorities, will serve as senior advisor on rental assistance, while Alanna McCargo, recently the vice president for housing finance policy at the Urban Institute, will serve as senior advisor on housing finance, to name two.
Sasha Samberg-Champion, who is now the deputy general counsel for enforcement for HUD’s office of general counsel, previously sued HUD in 2018 on behalf of the National Fair Housing Alliance and housing groups in Texas for failing to enforce the Affirmatively Furthering Fair Housing mandate. “HUD is taking the fair housing out of Affirmatively Furthering Fair Housing,” he told Bloomberg CityLab in 2020.
One critical appointment that will touch on Biden’s housing priorities is already the subject of some controversy. Last week, the Biden administration indicated that it will likely appoint Michael Barr, an Obama-era Treasury Department official, to head up the Office of the Comptroller of the Currency, a Treasury Department agency that will have an enormous impact on the future of fair lending standards.
Late in the Trump administration, the Office of the Comptroller finalized a rule that critics describe as gutting the Community Reinvestment Act, a law that requires banks to fully serve the communities in which they are located.
While the Biden administration will no doubt rescind this rule, advocates say that the Community Reinvestment Act badly needs to be updated to account for online-only banks that don’t have brick-and-mortar locations, as well as other 21st century changes in lending.
Barr has received approving remarks from many, including National Community Reinvestment Coalition chief Jesse Van Tol, but several voices from the Democrats’ progressive wing — among them Senate Banking Committee Chair Sherrod Brown and House Committee on Financial Services Chair Maxine Waters — have pushed back against the appointment. Some want to see University of California, Irvine School of Law professor and The Color of Money author Mehra Baradaran in the seat instead. (One Baradaran supporter even announced that he will go on a hunger strike if Barr is confirmed.)
How far the administration can run with a housing agenda focused on racial justice may hinge on key personnel appointments, since legislation will be hard to move with a split Senate. Yet rule-making and enforcement may be the only tools that the Biden administration needs to radically change the federal government’s disposition on equity.
The Fair Housing Act, for example, has always required communities that receive federal housing dollars to actively pursue desegregation — but in the more than 50 years since that law was passed, enforcement of that policy has been lax at best.
“There’s no panacea, particularly for the people in the places that remain underinvested,” Jones says. “Housing is at the center of a lot of important things in the country. We now have a chance to take a look at HUD to bring in the talent, the tools, and the policies to do the things that are relevant to this time right now.”
Can An ‘Activist HUD’ Make Housing A Human Right?
The nominee for the U.S. federal housing agency lays out her plans to fulfill President Biden’s ambitious housing agenda.
In a rare display of bipartisan unity, Ohio’s Republican and Democratic senators co-introduced their Buckeye State colleague, Representative Marcia Fudge, for her Senate confirmation hearing Thursday to become secretary of the agency that oversees federal housing policy in the U.S. But that bipartisan spirit may run only so deep.
Pennsylvania Senator Pat Toomey lit into sharp statements made by Fudge in the past about the Republican Party. An aide to a GOP lawmaker even told Politico that Republicans are concerned that Fudge’s positions on the safety net will make her the head of an “activist HUD.” It’s a term that’s surfaced in the past to describe a version of the Department of Housing and Urban Development deemed too ambitious for its ambit.
The secretary-designate addressed the sentiment if not the specific comment: “I understand that there are people who think we are doing more than we should. I believe we are not doing enough.”
So what might a so-called activist HUD accomplish?
During her confirmation hearing, Housing Secretary-designate Marcia Fudge spoke about expanding rental assistance, creating more opportunities for homeownership and arresting the pandemic eviction crisis — priorities that fall in line with those outlined by housing advocates.
If confirmed, Fudge will bring more direct federal experience to the office than any candidate in 20 years. As a member of Congress and former mayor of Warrensville Heights, an east-side suburb of Cleveland, she has seen the challenges of affordable housing firsthand, she testified.
As housing secretary, Fudge will have an extraordinary mandate from President Joe Biden to pursue racial justice and equity in housing as top priorities.
“It bears mentioning, particularly in this moment of crisis, that HUD — perhaps more than any other department — exists to serve the most vulnerable people in America,” Fudge said in her prepared remarks. “That mandate matters a great deal to me. It is consistent with my own values, and it is precisely what has always motivated me to service.”
And while housing experts say that preventing a full-blown eviction and foreclosure crisis during the pandemic will continue to occupy the department, they point to policies to expand the Black homeownership rate and break down barriers to new apartment buildings as potential pick-ups. Fudge committed to both of those priorities during her confirmation hearing.
Yet the Biden administration may go much further: One of Biden’s and Fudge’s proposals could utterly transform the safety net and is intended to make housing “a right, not a privilege,” as the Biden campaign has described it.
The president has called for expanding the Housing Choice Vouchers program, more popularly known as Section 8, to be a federal entitlement, meaning that anyone who qualifies for federal rental assistance under the program will receive it.
Currently, the Section 8 program is besieged by years-long waiting lists at a time when need is only growing for vouchers that serve as the primary alternative to limited public housing for people who can’t afford housing on their own.
“We need to expand resources for HUD’s programs to people who are eligible,” Fudge said in her prepared remarks, noting that just one in five eligible households receives assistance from federal housing programs.
Section 8 housing vouchers serve a little over 2 million households today. However, there may be 16 million households in the income range who qualify and who have a need for housing vouchers but don’t receive them, according to Will Fischer, senior director for housing policy and research at the Center on Budget and Policy Priorities. That’s the figure before fully accounting for hardship during the pandemic.
“Many housing agencies close their waiting lists because they get so long, there’s no point,” said Fischer. An eligible household looking to participate in the program will wait an average of three to four years, he says. “There was an enormous need for this kind of assistance even before this pandemic hit, and it’s going to persist well after it’s over.”
Had Section 8 been a federal entitlement program all along, Fischer adds, there would have never been talk of an “eviction tsunami” after the novel coronavirus pandemic struck. Americans would not have fallen tens of billions of dollars behind in back rent.
State and local housing agencies would not have been forced to stand up hundreds of emergency rental assistance programs, a process that slowed down aid delivery by months. Instead, Congress would have had a ready tool to meet the pandemic crash head on. “If we had a universal voucher program when the pandemic hit, the story would have been very different,” Fischer says.
Expanding the Housing Choice Vouchers program as a federal entitlement comes with a hefty price tag: $410 billion over 10 years, according to a pre-pandemic estimate from the Congressional Budget Office. The Biden administration could pay for this subsidy by pursuing another reform: eliminating the mortgage interest tax deduction, which costs the federal government at least $70 billion annually.
“If we had a universal voucher program when the pandemic hit, the story would have been very different.”
Emily Hamilton, senior research fellow at the Mercatus Center at George Mason University, says that expanding Section 8 is the strongest plank in Biden’s housing agenda. In a new review of Biden’s housing platform, Hamilton recommends an experiment for HUD: Give cash to some recipients in lieu of a housing voucher. This might serve as a workaround for one of the biggest drawbacks to vouchers.
While Section 8 is a proven tool for reducing poverty and boosting opportunity, many landlords remain skeptical of the program. Part of that is bias and discrimination among landlords, but as Johns Hopkins University’s Stefanie DeLuca and other researchers have shown, landlord outreach is critical to the success of any housing assistance program.
“HUD has done a few pilots in recent years altering how vouchers are delivered,” Hamilton says. “Cash transfers offer recipients more flexibility. If someone wants to economize, they could live with roommates or family members to spend less and have money left over for other priorities. Additionally, there’s a big problem right now with source-of-income discrimination. Some of that may be due to actual discrimination on behalf of landlords, in which case transfers won’t be better, but at least part of that is landlords not wanting to jump through HUD hoops.”
While both Biden and Fudge have mentioned the expansion of housing vouchers as a top priority, the issue didn’t come up for a detailed discussion during Fudge’s confirmation hearing.
In a previous call with reporters, Ohio Senator Sherrod Brown, the incoming chair of the Senate Committee on Banking, Housing and Urban Affairs, said that Senate Democrats will take up Biden’s commitment to expand housing vouchers and that the committee is looking into the possibility that it can be done with just 50 votes in the Senate through budget reconciliation.
“Nothing’s off the table when it comes to providing more accessible, affordable, safe, clean housing for people,” Brown said during the call.
Race and equity — the singular focus of a package of executive orders signed by Biden on Jan. 27 — came up several times as GOP senators questioned Fudge during her hearing. Arkansas Senator Tom Cotton asked Fudge to explain the difference between equality and equity. “Equality means treating everybody the same.
Sometimes the same is not equitable,” Fudge replied. Louisiana Senator John Kennedy asked Fudge to address past comments she made about the Republican Party. “Do you think Republicans care about people of color?” he asked repeatedly. Yes, she said, agreeing with Kennedy that most do.
Among the proposals from Biden and Fudge to promote equity in housing is to introduce a permanent credit of up to $15,000 for first-time homebuyers. Details are sparse, but the idea is to make the credit “advanceable” — buyers could get the money right away rather than after they file a tax return, making the credit a form of down-payment assistance. Fudge said that the cost of down payments is the biggest obstacle to would-be Black homebuyers.
“One of the challenges that Black families see around homeownership is limited capital in order to invest,” says Malcom Glenn, a fellow in the Future of Land and Housing program at New America. He mentions tax-advantaged 529 savings accounts for college tuition as a popular model for the federal government to help Black households built wealth through housing. “Creating a tax structure that really incentivizes using limited family funds that a family has for the purposes of homeownership would be a really valuable effort.”
Hamilton cautions that expanding rental aid and subsidizing down payments will lead to higher costs in places with serious housing supply constraints, especially but not exclusively coastal areas. Housing vouchers require recipients to pay one-third of their income toward the rent no matter what, so expanding the program dramatically won’t affect them — but it may price out residents who aren’t eligible for vouchers if landlords raise rents to keep up with a voucher-fueled boost in demand.
The same goes for first-time home sales: Industry groups fear that a big increase in the number of qualified homebuyers will lead to higher prices, especially when mortgage rates are so low.
Fudge had an answer for housing shortages. Asked by Hawaii Senator Brian Schatz what she would do to encourage communities to abandon restrictive zoning ordinances that limit new development, Fudge said, “We have to get rid of this notion of not-in-my-back-yard.”
The country’s first “Yes In My Back Yard” housing secretary may have some tools at her disposal to pursue the YIMBY agenda. House Majority Whip Jim Clyburn and New Jersey Senator Cory Booker have proposed a bill to make federal block grants contingent on easing zoning restrictions.
Community Development Block Grants are flexible, and local leaders would be loathe to give them up, although not all communities get them. Hamilton suggests a tastier carrot: Encourage local zoning reform by creating a new flexible funding source, available specifically for jurisdictions that do the actual zoning, based on housing market outcomes.
Public housing, the progressive left’s preferred alternative to vouchers, did not get a hearing during Fudge’s confirmation. But on Jan. 27, Biden reiterated his pledge to build 1.5 million new energy-efficient affordable homes and public housing units, and he plans to hike funding for the Housing Trust Fund by $20 billion. Progressive lawmakers who want to see public housing as the engine for a Green New Deal are calling for much, much more spending in this category.
Critics such as journalist Matthew Yglesias say that public housing would be defeated by the same forces that quash private housing: “The basic NIMBY toolkit in the United States — zoning, community review, lawsuits, more lawsuits, more review, more lawsuits — binds the public sector just as much as the private sector.”
The next housing secretary may take action to relax local regulations that make U.S. housing unaffordable. At the top of her agenda is reinforcing civil rights-era mandates that the country has let slide for more than 50 years. As housing secretary, Fudge can do both: pursue fair housing by promoting equitable growth.
Her first two policy priorities will be undoing rules set during the Trump administration that rolled back fair housing discrimination. But simply reinstating these protections are the floor of what is possible, Glenn says.
“So much of the real existential challenges that Black families face when it come to housing didn’t start with this pandemic,” Glenn says. “These issues go back quite frankly to Reconstruction, and all of the very intentional efforts on behalf of government entities at all levels to undermine Black families to get access to property.
It’s a tall order to expect President Biden to remedy all of those issues.” He adds, “Just recognizing he has an opportunity to repair some of the damage that was done over the last four years is where I would say he should start.”
Before HUD can address any of these issues, Fudge testified, the department has to focus on protecting tenants and landlords alike from a potential eviction crisis.
“We cannot afford to allow people in the midst of the pandemic to be put on the street,” Fudge said.
Bank Of America Adds $10 Billion To Affordable-Housing Plan Through 2025
Bank of America Corp. pledged to add $10 billion to an affordable-homeownership program through 2025, tripling its initial commitment.
The plan is aimed at low- and moderate-income communities, and may enable 60,000 individuals and families to purchase homes, the bank said in a statement Wednesday. The program includes as much as $10,000 of assistance for down payments, as well as grants of as much as $7,500 for closing costs such as title insurance and recording fees.
“If you look at the numbers, you can see there is a disparity of low- and moderate-income individuals in communities of color in terms of homeownership percentages,” D. Steve Boland, president of retail at Bank of America, said in an interview. “We want to work to bring that disparity down, and we want to do it in a responsible way.”
The latest pledge expands on an initial $5 billion commitment from 2019, which facilitated 21,000 home purchases and $180 million in grants for down payments and closing costs. New homeowners from that cohort have been able to withstand the economic shock from the pandemic relatively well, Boland said. They’ve had low rates of mortgage deferrals, the vast majority of which have rolled off.
The expanded homeownership program comes after the Charlotte, North Carolina-based lender last year made a separate, four-year commitment of $1 billion intended to address economic and racial inequality. That pledge includes investments in minority-focused banks and investment funds.
America Has A Housing Mess, And President Biden Wants To Fix It
A once-in-a-generation influx of federal funds would be welcome, but deeper reforms are needed.
U.S. housing policy is practically geologic in form. Since the 1930s, the federal government has rolled out layer upon layer of programs and incentives to help the poor, the middle class, veterans, and others afford homes. What we have today is an accretion of policies and bureaucracy that’s complex and inadequate for today’s needs.
“It’s like sedimentary rock,” says Chris Herbert, the managing director of the Harvard Joint Center for Housing Studies. “There’s never really been a time when we sat down and said, ‘Let’s think about a coherent U.S. housing policy.’”
President Joe Biden wants to do better. With a possible eviction crisis looming and home prices spiraling further out of reach for many buyers, his administration is pushing for the biggest federal housing investment in decades—one that’s also designed to advance goals on climate and racial equity.
This includes the more than $300 billion his administration has proposed to “build and modernize” housing as part of its sprawling infrastructure package, as well as a raft of social spending that will increase the amount of money Americans have to keep roofs over their heads. All this would come on top of the more than $50 billion in emergency funds Congress has allocated to help households that missed rent and mortgage payments during the pandemic.
The flood of money comes after decades in which federal spending on housing assistance receded. That pullback, as well as years of underbuilding, contributed to an acute affordable housing shortage going into the pandemic. Almost 11 million households spent more than half their income on rent in 2018, a level of financial stress that frequently tipped people into crisis.
Here’s one mind-boggling number: On a single night in January 2020, more than 580,000 individuals were homeless in the U.S., according to a once-a-year count organized by the Department of Housing and Urban Development.
Covid-19 has only exacerbated the inequities built into the system. Black and Hispanic households have lost jobs at higher rates than White families and are more likely to be behind on rent or mortgage payments.
At the same time, the Federal Reserve’s easy monetary policy sent mortgage rates to historic lows, allowing the well-heeled to refinance and buy second properties, while many first-time buyers are finding themselves shut out of the booming market.
“If you don’t have excellent credit, if you don’t have a really high and competitive down payment, and if you don’t have the ability to go over ask, good luck,” says Ali Wolf, chief economist at Zonda, a housing data and consulting firm.
The emergency rental assistance Congress authorized this year and last, as well as policies such as the Centers for Disease Control’s eviction moratorium, are meant to prevent people from falling further and compounding their hardship.
“One of the gaps we inherited that we are now forced to take on is the lack of a widespread structure to help Americans avoid unnecessary and potentially devastating evictions,” says Gene Sperling, a senior advisor to the president overseeing the $1.9 trillion coronavirus relief package passed in March. “We are racing to close that gap.”
Still, these outlays have been slow to get to renters in some places and are just Band-Aids for the underlying problems. That’s why the White House is pushing for even bigger investments as a part of the president’s American Jobs and Families Plans.
These include a sharp increase in tax credits—outlined on May 26—to help finance affordable housing—and $40 billion to fix up public housing, which would disproportionately help communities of color. Expanded child tax credits would put more money into families’ pockets, and an increase in funding for housing vouchers in the president’s budget blueprint could help 200,000 additional households afford rent.
These supports for lower-income Americans could really move the needle in parts of the country where there are already enough homes but local wages haven’t kept up with rising housing costs, says Carol Galante, faculty director at the Terner Center for Housing Innovation at the University of California at Berkeley. In such high-cost regions as the San Francisco Bay Area, Seattle, and Boston, though, it won’t be enough to drive down rents, she says.
Expanding the supply of homes in those places will require taking on the Nimbys. On this front, the Biden administration’s solution is a voluntary grant program that would give local jurisdictions money to fund what can be the arduous process of reforming zoning laws and removing other obstacles to increasing density.
Such local laws—including parking requirements for new construction and prohibitions on multifamily dwellings—have furthered housing segregation, exacerbated sprawl, and driven up costs. But some prosperous places probably won’t take the money, says Joe Cortright, director of City Observatory, an urban policy think tank based in Portland, Ore.
A more effective approach would be to tie federal transportation dollars to the reforms, says Sarah Saadian, vice president of public policy at the National Low Income Housing Coalition. “That’s the money that’s really sought-after and would be persuasive,” she says.
In the near-term at least, the administration is also fighting market forces that are making it harder to add more housing. The price of lumber is soaring, driving up the cost of constructing a home by almost $36,000 in the last year, according to the National Association of Homebuilders.
A shortage of build-ready lots and labor are also holding back construction. Add it all up, and what you get is inflation in the cost of shelter that could exceed 4% annually by 2023, a higher level than at any other point in the previous economic cycle, researchers at Goldman Sachs Group Inc. estimate.
While several of the administration’s housing proposals have bipartisan backing, hopes for advancing an infrastructure bill that Republicans support have dimmed.
That could force Congress to pass many of the president’s priorities through budget reconciliation, a fast-track process that could clear both chambers with only Democrats voting in favor. But just getting moderates and progressives in that party to agree may keep the administration from reaching for more ambitious reforms.
Take the mortgage market. Currently, people can get government-backed loans to buy homes in parts of South Florida that are already experiencing seasonal flooding because of rising sea levels. The U.S. could choose to stop subsidizing their mortgages, says Jenny Schuetz, a senior fellow at the Brookings Institution who studies housing policy. “That seems like low-hanging fruit, but so far we have chosen not to do it.”
Whatever form the Biden housing plan takes, administering it effectively would be an enormous task. “The biggest risk is implementation,” says Galante, who was an assistant housing secretary during the Obama administration before going to UC Berkeley. “The thing that bureaucrats fear more than anything is being criticized by Congress for not getting the money out, or getting the money out in a way that is abused.”
The pandemic has forced the federal government to be more nimble as it sets up programs and deploys relief money to states and local jurisdictions.
That could help lay the groundwork for spending on housing through an infrastructure package, says Erika Poethig, special assistant to the president on housing and urban policy. “We have incredible collaboration across the agencies,” she says. “So I’m hopeful that the resources allocated through these plans would land well and start to really handle some of the backlog.”
7 Tips To Get The Best Possible Interest Rate On Your Mortgage
It’s not the easiest housing market. Here are ways to help your borrowing match your budget.
Shopping for the perfect home can be fun. Shopping for the perfect mortgage rate? Not so much.
A fast-moving housing market means borrowers need to take extra care. At the very least, you’ll want to double-check your housing budget and keep a close eye on the market as rates move.
Some borrowers may also want to consider new bidding and borrowing strategies to help keep the rate they pay down—if not quite to the level it might have been six months ago, when mortgage rates were still near record lows.
“It’s not a time for the faint of heart to be buying a home,” says Matt Hackett, operations manager at Equity Now, a direct mortgage lender.
While There’s No Bringing Back The Record-Low Mortgage Market Of 2021, Here Are Seven Tips For Making The Most Of A Difficult Market:
1. Double-Check Your Budget
Higher mortgage rates don’t just mean home buyers pay more. They could mean you’ll be able to borrow less. If you set your housing budget in late 2021, it might be time for a reset.
In one of the sharpest run-ups in memory, 30-year mortgage rates jumped from around 3.5% in January to well over 5% in May. That equates to an additional 17% surge in home prices, according to Greg McBride, chief financial analyst for Bankrate.com.
If, say, for instance, you were targeting a monthly principal-and-interest payment of $4,000 when rates were 3.5%, you could have afforded a loan in the range of $675,000. But at 5.5%, you could only afford to borrow $525.000.
If you’re running the numbers at various rates using online calculators, remember you have to figure in your downpayment and closing costs, plus ongoing expenses of taxes, insurance and maintenance costs.
One rule of thumb is to assume you will have to set aside 1% of your home’s value every year to pay for upkeep.
2. Make A Habit Of Checking Rates Each Week
Once you know what you can spend, you’ll want to make sure rates don’t move on you again, putting further strain on your budget. If you’re trying to make a purchase, you should check in with lenders at least once each week, according to mortgage brokers.
Weekly rate movements are typically less than 0.05%, although in this year’s fast-moving market they have reached 0.25% or more, according to Mike Tassone, co-founder of Own Up, a mortgage broker.
Your mortgage broker or loan officer can keep you in the loop. You can also monitor the action yourself: You can find daily average rates in The Wall Street Journal’s markets data section, while weekly ones are published by loan guarantors Fannie Mae and Freddie Mac.
Another tip is to follow the yield on the 10-year Treasury note (ticker symbol: TNX), which lenders use as the peg to price 30-year mortgages (since relatively few borrowers keep mortgages for the full 30-year term.)
“As the yield goes up, mortgage rates tend to go up. As the yield goes down, mortgage rates tend to go down,” says Cameron Cook, a senior wholesale mortgage broker with CSI Mortgage Design by Cameron in Lone Tree, Colo.
3. Consider A Mortgage Contingency
Once you get to the bidding stage, you want to make sure nothing can upend your deal.
One way to create a little wiggle room is to ask for a mortgage contingency in your purchase agreement. These contract clauses (which also must be agreed to by the seller) can give you an out if, say, rising rates make it no longer possible to purchase the house with 80% financing, or if mortgage rates move outside a certain range.
“This might make it easier to sleep at night,” says Shaun Pappas, a partner with Starr Associates, a real estate law firm in New York.
Still, he points out there is a risk: “In a hot seller’s market, many sellers will look at non-contingent deals over contingent, even if the price for the contingent deal is a little better. Sellers want firm deals with no way to cancel.”
4. Tighten Your Rate Lock
Once you pick a lender and begin the process of applying for a loan, you should be able to “lock” the rate in place, protecting you from further increases. And there are additional steps you can take to make sure there are no surprises.
Typically a mortgage lender offers a rate lock after your initial loan application has been received but before it’s submitted for underwriting. Most rates are locked for between 30 to 90 days with some longer-rate lock periods offered to accommodate things like delayed closings or new construction.
However, if you do not close during the rate lock period, and the rate lock expires, your rate will begin to float and be subject to daily rate changes.
One option is to extend your rate lock. It will cost you though. A typical mortgage rate lock extension costs about 0.5% of the total loan amount and can be extended for up to 120 days, says Pappas.
What if rates actually go down? You can also add a float-down provision to your loan which will allow you take advantage of any decline, as long as the new, lower rate meets a certain threshold.
Usually it must be at least a quarter point below your original rate. But again, there’s typically a fee associated with this as well.
While most lenders offer a rate lock as a matter of course, if yours doesn’t you should definitely be proactive, according to Maura Ann Dowling, a certified financial planner and faculty member in the finance department of Bryant University in Smithfield, R.I..
“Locking in a rate is always a good idea as soon as you begin a mortgage relationship,” she says. “Then, if rates move up, you are protected.”
5. Think Beyond The 30-Year Mortgage
It’s not hard to see why homeowners love the security of a 30-year mortgage. But if you are looking to lower your interest rate, sacrificing a little peace of mind can lead to substantial savings.
With an adjustable rate mortgage, or ARM, the initial interest rate is fixed for a period of time. After that, the rate applied on the outstanding balance resets periodically, based on prevailing market rates. The most common introductory ARM terms are five, seven and 10 years.
Because you’re are taking on future interest-rate risk as an ARM borrower, you’ll receive better rates during the initial, fixed period of the loan than you would with a 30-year mortgage.
In recent years ARMs haven’t looked that attractive: With 30-year mortgage rates near historic lows, there wasn’t much room for these loans to shave off what borrowers were paying. In recent months as rates climbed, the gap has widened.
Homebuyers who switch from a 30-year loan to a 5/1 ARM (with a fixed rate of five years) can now expect to lower their rate roughly 1 to 1.25 percentage points, based on data from Freddie Mac. That’s a difference of about $300 a month on a $400,000 loan.
Of course, with a five-year floating rate loan, you could end up paying more if rates are even higher in the future. But that’s only a real worry if you plan to remain in your home longer than five years. Most homeowners with 30-year mortgages keep them for less than 10 years.
6. Pay For Mortgage Points
Another way to get a lower mortgage rate is to pay your lender for it. In the mortgage world, this is known as “buying points.”
Typically you can lower your rate by one-quarter percentage point for every 1% of the loan’s total value that you pay upfront to the lender. When rates were low several months ago, relatively few borrowers chose to buy points.
But, as The Wall Street Journal newsroom recently reported, the option exploded in popularity as mortgage rates rose.
Because of the big upfront cost, points make the most sense when you plan to stay in your house more than a few years. For instance, a borrower offered a 5.5% rate on a $400,000 mortgage could lower the rate to 5% by paying $8,000 at the outset.
The move could save the borrower more than $45,000 if they stayed in the home for a decade, according to Bankrate.com’s mortgage calculator. But they would come out behind if they moved out before year five.
In other words, if you can spare the cash, points can be a great way to save money in the long run. Just make sure you are willing to stick it out.
“If you end up selling your home before you anticipate, the buy down is less attractive because the cost upfront could be more than the overall savings,” says Pappas.
7. Time Your Mortgage Decision Based On Your Own Needs
The biggest mistake you could make is to rush to make a purchase you truly can’t afford because you’re afraid rates could climb.
“In these situations, it’s better to pause your search than to get into a precarious financial situation,” says Jerimiah Taylor, vice president of real estate and mortgage services at OJO Labs, a real estate company.
If you can afford the payment at current rates on the home you want to buy, it’s probably foolish to hold off in the hope that 2021’s rates will return, say mortgage experts.
Do your best to put forward a strong offer. In the current climate, that means making clear to the seller that the new interest-rate environment hasn’t blown up your budget: “Make sure that you indicate that you have been pre-qualified for that offer,” says Dottie Herman, vice chair of real estate brokerage Douglas Elliman.
If you’ve found a home you want and the numbers work, should you hold off for a better rate or move forward? ”It’s hard to bet on the market and wait for rates to decrease, because they could increase instead,” says Jodi Hall, president of Nationwide Mortgage Bankers.
It’s OK to tune out the current collective lamenting about rising rates and buy the home you want and can afford.