Experts keep a careful watch on the mortgage industry, and for good reason: shifting trends in the market have trickle-down consequences that affect everyone. Fluctuations in interest rates have the ability to impact the U.S. economy, alter the behavior of lenders, or convince potential buyers around the country that the time is right to buy a home or that it’s best to continue to rent for the foreseeable future.
Despite many forecasts to the contrary, mortgage rates have fallen in 2022. Though the housing market situation has not shifted dramatically this year, the lower-than-predicted rates could mean it’s time for sellers, buyers, and mortgage holders alike to reassess their options or pursue unexpected refinancing opportunities.
For those shopping around for a new home, purchasing a mortgage is often a necessity, particularly for first-time buyers, 85% of which choose to go the home mortgage route over paying cash, while a still-high 69% of repeat buyers also opt to do so (Source). Because of the obligatory nature of purchasing a mortgage, a solid understanding of the facts and figures surrounding the mortgage industry is essential for potential buyers.
With this basic American need in mind, we’ve delved into a wide swathe of sources to compile an in-depth statistical snapshot of the home loan market in 2022, along with a useful guide to choosing the right mortgage to suit your purposes.
America’s mortgage debt
- Altogether, America’s total mortgage debt is $11.39 trillion, a figure that has incrementally risen since 2020. This sum includes debt from businesses, financial institutions, and homeowners.
- Debt on 1-4 family residence properties accounts for the lion’s share of the total: $10.9 trillion. These days, mortgage debt on farms is just a small slice of the whole, about $254 billion.
- Major financial institutions are the leading holder of mortgage debt, with $5.52 trillion, followed by depository institutions, which account for $4.94 trillion.
Sources: Federal Reserve
Mortgage rates in 2022 are lower than predicted
- Many industry experts predicted a rise in mortgage rates through 2021 -2022, however, the opposite has happened. The average rate for a 30-year fixed-rate mortgage has fallen steadily since a recent peak in November 2018 of 4.94%.
- As of November 2022, the 30-year mortgage rate stands dropped to 6.81% from 6.85% the week before.
- With rates nearing the all-time low of 3.3% in 2012, the market is becoming friendlier towards buyers. However, other factors, including high prices and low availability, offset this development.
Why the lower rates?
Mortgage rates are likely down due to slowing economic growth in markets around the world and less than optimistic prognostications. Insiders fear that the global economy may be entering a slump, with President Trump’s escalating trade war with China and stagnancy in European markets principal among the threats against shared economic prosperity.
How does this rate drop affect the potential homebuyer?
When fixed rates are this low, they are preferable to adjustable-rate mortgages (ARMs), a type of mortgage with rates that automatically adjust in response to market indexes. While risky, ARMS do deliver lower monthly payments during periods of high-interest rates, with the potential to rise significantly in the future. Currently, they are not in high demand.
Still a seller’s market
While low fixed-mortgage rates are good news for enterprising home buyers, the U.S. housing market remains favorable towards sellers. This is mainly due to two factors:
- High home prices
- The shrinking availability of new homes
Prices continue to rise
According to leading data and analytics firm CoreLogic, U.S. home prices rose 11.9% from August 2021 to August 2022. (Source).
The Federal Housing Finance Agency’s quarterly U.S. House Price Index Report gives a more complete account of rising prices around the country.
Here are some key findings:
- House values have increased over 32 consecutive quarters.
- Prices rose in all 50 states and the District of Columbia between Q2 2021 and Q2 2022.
- House prices increased the sharpest in 1) Idaho, 11.4% 2) Utah, 7.7% 3) Tennessee, 7.2%, 4) Georgia 6.9% 5) Arizona, 6.9%.
- The five areas recording the smallest appreciation were 1) Delaware, 1.2% 2) Maryland, 1.5% 3) District of Columbia, 1.8% 4) Iowa, 2.2% 5) New Jersey, 2.7%
- Prices rose in all of the U.S.’s 100 largest metropolitan areas (Source).
Rising home prices indicate a robust economy, but they offset the savings of low mortgage rates and can freeze low-income and first-time homebuyers out of the market. At the end of the day, if the house goes for a high price, the monthly payment on your mortgage is going to be correspondingly high.
We need more houses
The shortage of homes for potential buyers is another factor impacting home sales and giving sellers an advantage. For years, home construction in the United States has not kept up with buyers’ demand.
According to Chris Herbert, the managing director of Harvard University’s Joint Center for Housing Studies, the 1.2 million new homes built each year in the U.S. are not enough to meet demand, and “we should be producing 1.5 or 1.6 million homes a year.” (Source)
The situation has improved since the beginning of 2019, when the number of homes for sale in the country fell to the lowest figure in recorded history (Source), yet remains an issue for buyers. Factors perpetuating the homes shortage include labor shortages, increasing material costs and a lingering skittishness on the part of developers towards building new homes en masse, in the wake of the loony overexuberance of the aughts.
One thing is clear: the scarcity of homes in the market is driving up prices and lowering affordability. In Q3 2019 just 56% of homes for sale were affordable for the typical family, down from 78% in 2012 (Source).
Houses are getting larger
In 2015, the median-size new house in the U.S. swelled to 2,687 square feet, up from 2,400 sq. ft. in 2010 and a modest 1,660 sq. ft. in 1973. That’s a 62% increase in average size over 42 years (Source).
The ever-expanding size of American homes has driven up home prices and alienated those not in the market for a McMansion. First-time buyers tend to look for smaller, single-family homes, which account for an increasingly lower share of available new houses.
Focus on first-time buyers
At present, 28% of buyers are purchasing their first home. Coupled with the fact that 85% of first-time buyers purchase a mortgage, it’s easy to see why the industry places a focus on this segment of the buyer population (Source).
First-time buyers take in less income on average than repeat-buyers ($72,500 vs. $77,500), and the median price of the homes they buy is lower ($230,000 vs $242,000). They are also more likely to be denied at least once (29%) before being approved for a mortgage.
Yet, 71% of first-time buyers are approved for a mortgage without issue. Perhaps this is due to their greater tendency to hear out competing offers from multiple lenders, as 54% of first-time buyers consult with two or more lenders compared to just 37% of repeat buyers (Source).
Qualifying credit score for a mortgage
There is no fixed credit score requirement for getting approved for a mortgage, and standards vary depending on the financial institution, the type of mortgage, and the area of the country. However, Federal Reserve statistics give a good sense of the range of credit scores most lenders find acceptable.
According to the Federal Reserve, the median credit score for mortgages taken out in 2019 is 759. Furthermore, 90% of mortgages purchased in the first quarter of 2019 were by buyers with a credit score of 650 or higher, while 75% had a score above 700. Just 10% of those taking out mortgages had credit scores below 647. (Source).
The national average credit score is 704, meaning a mortgage borrower’s average score is 59 points higher than that of the average American (Source).
For buyers with a lower credit score, getting a loan amount through the more forgiving Federal Housing Administration is a good option. The average FHA mortgage borrower’s mortgage was 676 in 2017, while 7.3% had a score under 620. Borrowers are required to have a score of 500, at minimum (Source).
Details of down payments
Few are exempt from paying a down payment when taking a mortgage out on a house, with the exception of military members and veterans. Chances are you’ll be obligated to put one down. At the low end of acceptable down payments, one will still be required to pay 3% to 3.5% of a home purchase price.
A study by Attom Data Solutions found that in Q3 2017, the median down payment for newly purchased homes in the U.S. rose to a new high of $20,000, up from $14,400 in Q3 2016. This average down payment of $20,000 equals out to 7.3% of the median home price.
The study further reported that the median down payment topped $50,000 in 12 metropolitan statistical areas around the country, including San Francisco, CA, Los Angeles, CA, and Boulder, CO (Source).
Paying a large down payment is optimal if you can swing it: those who pay down 20% of the price of their home can bypass mortgage insurance.
Check out our roundup of the Best Homeowners Insurance
Origination fees and other costs
An origination fee is a term for the sum paid to a mortgage lender in return for processing the loan. It is usually a small percentage of the loan, along with an assortment of other small fees.
Compared to the average down payment sum, origination fees fluctuate depending on a variety of factors, including the type of mortgage, the lender, and the borrower’s credit score. Generally, they are between 0.5% and 1%, meaning that a $200,000 loan would equal out to an origination fee between $1,000 and $2,000.
The demographics of mortgages
Compared to past generations, Millennials have been slow to embrace home ownership. Owing to some generational setbacks, which include coming of age during an economic recession, amassing huge piles of student debt, and feeling locked out of a pricey housing market, the generation lags behind its forebears in buying the first house: just 37% of Millennials between the ages of 25 and 34 are homeowners compared to the 45% of Baby boomers that bought the first home when they were between 25-34. In that era, wages were higher relative to the cost of living and homes were cheaper, on average (Source).
What’s more, Baby boomers have hampered Millennial homeownership directly through their life choices. Young buyers historically depend on older generations to put their homes up for sale, keeping the market active. Yet Boomers, owners of 43.5% of U.S. homes, are retiring later than previous generations while continuing to live in their homes rather than moving in with family or joining retirement communities. As a result, their homes stay off the market, contributing to the nationwide home shortage and keeping prices high.
Yet, there’s a good chance that Millennials’ time as home buyers has arrived. With a large share now entering their 30’s, they are beginning to shop for homes en masse. They already claim the largest dollar volume share of new mortgages in the U.S. with 42%, while Boomers account for 17% and Generation X, 36%. However, Millennials still pay lower down payments than other generations, averaging a down payment of 8.8% versus Gen X’s 11.9% and Boomers’ 17.7% (Source).
Boomers are not without their housing woes: members of the generation were three times more likely to have remaining mortgage debt in 2015 compared to a homeowner of the corresponding age in 1980 (Source).
Mortgages and race
Although it’s against the law for lenders to discriminate on the basis of race, there is evidence that blacks and Hispanics face a disproportionate struggle in getting approved for a mortgage.
According to the recent Home Mortgage Disclosure Act (HMDA) data, it was found that 19.8% black applicants were denied mortgages in 2020, while just 11% of Asian and white applicants were denied. The most common reason given for rejected applications varied depending on race: for whites, Asians, and Hispanics their high debt-to-income ratio was the most frequent explanation, while for blacks it was a bad credit score.
Hispanics and blacks’ relative difficulty in securing a mortgage does not offer hope that the ethnic groups can branch the considerable home ownership gap in America, with 71.9% of whites owning their homes compared to 44% of blacks and 47% of Hispanics (Source).
Delinquency rates and foreclosures continue to drop
In a positive development, the percentage of U.S. mortgages in some stage of delinquency recently hit a 20-year low of 3.6% in April 2019, a 0.7% decline compared to April 2018’s 4.3%.
Foreclosures are also down slightly compared to the previous year, with April 2019’s 0.4% rate tying the prior five months for the lowest the market has seen in the 21st century. Corelogic credits rising home prices and declining unemployment for this reduction in mortgage delinquency (Source).
ARMs grew popular in the wild and loose 2000’s housing market, but cautious homeowners have made them a relatively uncommon choice — as of December 2018, just 9.2% of new mortgages had an adjustable rate (Source).
The preference for fixed-rate mortgages over ARMS is in part explained by 2019’s low-interest rates, along with lingering memory of their role in the mass of foreclosures during the late 2000’s housing market crash.
The numbers tell the tale: Marketwatch reported in February 2019 that the average ARM of $688,400 was two and a half times the size of the average fixed-rate mortgage of $280,900. These days, few are willing to commit to a loan with a much larger balance in the hopes of refinancing at a later date (Source).
When to refinance
As mortgage rates continue to drop, the percentage of homeowners with shifting loan-to-value ratios that could benefit financially from refinancing their mortgage grows.
In a recent Mortgage Monitor report, Black Knight put the number of homeowners with the incentive to refinance at 5.9 million, a three-year high. They estimate that these 5.9 million could cumulatively save $1.6 billion in monthly savings, or $271 a month per mortgage holder (Source).
Even with low-interest rates, not all borrowers stand to benefit from refinancing, so it helps to employ the services of a mortgage refinance calculator to determine when the time is right for you.
The emergence of FinTech
In the past decade, FinTech lenders have claimed a larger share of the mortgage market, going from 2% in 2010 ($34 billion) up to 8% (161 billion) in 2016 (Source). The term “FinTech” is short for “financial technology” and though the term is not clearly defined, for the purposes of the mortgage industry, it applies to a lender using an exclusively online mortgage application model.
It’s clear that FinTech lenders have some advantages over traditional lenders: they are able to process applications five times faster on average than traditional lenders and offer lower default rates. With less than 10% of the market share, FinTech lenders have a lot of room for expansion in the industry and will continue to do so if current trends persist (Source).
Top mortgage lenders
Here are the top five U.S. mortgage lenders in the United States by loan volume. Together, they logged $472 billion in mortgage originations in 2018.
Wells Fargo is considered the second largest private mortgage lender by a significant amount, with $228.6 billion in loans already made. Wells Fargo also issues other types of loans, such as private student loans and small business loans.
JP Morgan Chase
The fourth-largest private mortgage lender, J.P. Morgan Chase has issued approximately $205 billion in loans. Washington Mutual, as well as various smaller mortgage lenders, was acquired by the bank at the end of the 2000’s, and therefore, the outstanding debt owed to those firms as well.
Quicken loans is the biggest private mortgage lender that is not affiliated with any financial services corporation or large bank. However, it is still the largest online mortgage lender in the country. Quicken loans have made a whopping $342.7 billion in loans, which is even more than Wells Fargo.
When Pennymac was set up in 2008, the initial service was focused on distressed loans rather than originating new ones. This made them the youngest company on the list. Pennymac based in Moorpark, California, is a firm that focuses solely on direct consumer loans online and over the phone rather than in person or in-branch. However, it is still managed to generate loans to the value of $124.7 billion.
Bank of America
The Bank of America is considered a mega-bank offering pre-approval and pre-qualification with speedy pre-approval available for all online applicants. Loans are available to borrowers nationwide, and there are an array of loan options with competitive pricing and timely approvals. Mortgage rates are advertised on a daily basis. The Bank of America has generated $2.1 trillion in loans to date.
Reasons to buy a house
The National Association of Realtors reported the following statistics:
- Approximately 64% of movers have experienced a recent and significant life event, such as getting married or starting a new job.
- 44% of homebuyers aged between 22 to 29 said that commuting costs were a significant factor when it came to choosing a home.
- When it comes to purchasing previously owned homes, there are at least three factors that play a role in the decision-making process. This includes better overall price, better home value, as well as more charm and character.
- When it comes to purchasing a new home, three factors play a role in the decision-making process. This includes the ability to customize the house and the amenities of the new home communities, as well as avoiding renovations.
- Most young people that purchase homes do so because they desire homeownership.
- Lots of movers choose to move due to them needing to upsize or having to support their growing families. This is the primary reason why the majority of families who move, move.
- The key buying factor, as cited by 58% of homebuyers, is neighborhood quality.
Choosing a mortgage
Is it time to buy a house?
Ultimately, this is a philosophical question that only the potential home buyer knows the answer to. Sure, income, job security, current interest rates and the price-to-rent ratio of your area are worth careful consideration, but in the end, it’s not a decision reliant on data and statistics.
Purchasing your own real estate is a huge step: likely the biggest investment most Americans will ever make and one they’ll probably spend the next 30 years paying off. If these facts don’t scare you or hamper your enthusiasm for making the transition from renting to owning a property, then maybe it’s time.
Knowing your budget
While this isn’t a guide on choosing a home (we’ll leave that up to you), the home price you are able to commit to is crucial since it will determine the characteristics of the mortgage loan you’ll be attached to for the next few decades.
A common rule of thumb espoused by mortgage lenders is that your monthly mortgage or house payment shouldn’t exceed 28% of your monthly income before taxes. Of course, costs of living, student loan payments, children, etc, make each situation unique, but it’s a good number to start with.
For example, if your annual household income is $100,000, that calculates to $2,333 a month which can be allotted towards a mortgage payment.
Deciding on a loan option
Once you’ve nailed down a budget, it’s time to choose which type of mortgage works best for you. There are a ton of variables between loans, but they can be narrowed down into three principal categories.
Fixed vs. adjustable
We’ve already covered this earlier, but it’s worth reviewing the basic differences between the two types of interest rates. Fixed stay the same for the entire loan term, with payments that don’t change, while adjustable rates can start rather low, but vary unpredictably as time progresses or eventually become unaffordable.
The choice is yours, but the fact that less than 10% of borrowers opt for ARMS these days is worth noting (Source).
15-year vs. 30 year
The loan term you choose mostly depends on the size of the monthly payment that you can handle. For those that can afford it, a 15-year loan term might be a good option as you’ll pay less interest and pay off the house much quicker. However, for a majority of first-time buyers, a 30-year term is the safe option.
Another decision that depends on your circumstances. Most buyers opt for a conventional loan, i.e. one coming from a commercial bank or credit union. Yet, those with a lower household income may decide to apply for an FHA loan, a type of loan insured by the Federal Housing Administration with the intent of giving a leg up to those of lower income or stuck with bad credit. FHA loans are attractive for many due to their low 3.5% down payment rate, with 1 in 5 home buyers using an FHA when purchasing a home (Source).
The third category of loan type includes the department of veteran affairs issued loans for veterans and other programs available to other specific groups. Most buyers won’t be eligible for these types of loans, but if you are and the terms are favorable, you should probably take one.
Shopping around for lenders
After deciding on the right type of loan, it’s time to consult with lenders. It always pays to meet with a multitude of lenders, especially as a first-time buyer. Speaking with a variety of agents, comparing offers, and discovering what’s out there is a great way to build confidence and choose a mortgage on your own terms.
No need to go crazy either, just make a list of several possible lenders and after meeting with their representatives, etch out the pros and cons of each, while comparing them. Also, don’t forget to consult with friends and family whenever necessary.
Now it’s time to get pre-approved and put earlier budget estimates into sharper focus. Pre-approval is a slightly nerve-wracking but essential step wherein lenders scrutinize your financial history and information in order to decide whether you qualify for the mortgage you want. They look at a potential borrower’s
- Employment history
- Total debt
- Credit score and history
Once you are pre-approved, congratulations are in order. You are a large step closer to a new home. It’s important to note that mortgage pre-approval letters come with an expiration date of 4 to 6 weeks and you’ll have to get a new one if you don’t complete the mortgage process in the allotted time.
The following statistics are provided by the National Association of Realtors:
- Of all the homebuyers in 2021, 62% were married couples, while single females made up 18%, single males made up 9%, and unmarried couples made up another 9% of homebuyers.
- Additionally, 31% of all homebuyers in 2021 were first-time buyers.
- Of the 61% of homebuyers aged between 31 to 40, one or more children residing in the home were under the age of 18.
- 33% of homebuyers aged between 29 and 38 said that they were purchasing a home to take care of their parents.
- 86% of buyers, which is the largest percentage of homebuyers, purchase a previously owned home.
Deciding on a down payment
Now that everything else is in the bag, the last important decision you’ll have to make in the mortgage process is choosing the size of your down payment. Usually, the more the better, as a down payment of 20% or more will get you a lower interest rate and you won’t have to pay private mortgage insurance.
Of course, not everyone has that kind of cash on hand. But unless you take out an FHA loan, you’ll be expected to pay at least 5% of the price of the home. Most young first-time buyers put down 8%-9%, which is a reasonable number to shoot for.
When purchasing a home, you may be surprised to learn that the monthly costs also include utilities, HOA fees where applicable, insurance as well as property taxes. Additionally, housing costs are the most expensive in states like New York, California, and Hawaii.
In 2019, the average or median monthly mortgage payment was $1,487. This is as per the U.S. Census Bureau’s American Housing Survey.
Private mortgage insurance also referred to as PMI, is a specific type of mortgage insurance that you may be required to pay for if you have a conventional loan. Ultimately, PMI protects the lender and not the borrower if you stop making payments on your loan, like many other kinds of mortgage insurance.
A mortgage calculator is helpful when it comes to assisting borrowers in knowing their monthly mortgage payments based on a few factors, including the purchase price, down payment, and interest rate.
The national average closing costs for single-family homes is approximately $6,837, including taxes, as per the most recent data available.