Mortgage rates retreated from their rapid ascent this week, but still remain near 15-year highs, stifling homebuyer demand.
The rate on the 30-year fixed mortgage slipped to 6.66% from 6.70% the previous week, according to Freddie Mac, marking the fourth straight week the rate exceeded 6%. Despite the dip this week, rates are still more than double the level at the start of the year.
Rising rates have forced many budget-conscious buyers to rethink their purchase plans, while those who remain in the market are getting creative with their mortgage options and finding more negotiating power with sellers.
“Many buyers are sitting on the sidelines right now,” John Stearns, a senior mortgage loan originator with American Fidelity Mortgage Services in Wisconsin, told Yahoo Money. “The buyers who can afford to buy now come out ahead because they are getting in a house before rates go up further.”
Buyer demand continues to wane
Many buyers are saying no way to 6%-plus rates and are calling it quits for now.
The volume of mortgage applications last week for purchases dropped by 13% from the previous week, according to the Mortgage Bankers Association, and is down 37% versus a year ago. Contract signings in August — a leading indicator of housing health — also dropped 2%, the third straight month of declines.
It’s no surprise, either. The typical homebuyer’s monthly mortgage payment has increased $337, or 15%, in the last six weeks alone, according to Redfin data, pricing out many of those who were on their budget margins.
"Higher borrowing costs have caused consumers to think twice about major purchases like homes and cars," Realtor.com Chief Economist Danielle Hale said, in an emailed statement. "As challenging as it may be to set and stick to a budget in this environment of rising prices and rates, it’s more important than ever to do so."
The buyers still out in the market must be flexible.
Buying mortgage points — the fees paid to lower a mortgage rate — has become the norm. One point usually costs 1% of the loan amount and lowers the mortgage rate by 0.25%, according to Stearns.
“These days, people need to pay points just to get up to par pricing,” he said
Others have turned to family and friends, asking for monetary gifts to add to their down payment, while some are taking loans from their retirement accounts, several mortgage professionals told Yahoo Money. In other cases, sellers are also helping to close deals, including fronting some of the buyer’s closing costs and providing 2-1 buydowns, when the seller lowers the borrower's interest rate for the first two years of the loan by paying the difference in payment.
More buyers are also turning to adjustable-rate mortgages. It makes sense, too, because the average rate on a five-year ARM was 5.36% this week, according to Freddie Mac, 1.3 percentage points lower than the 30-year fixed rate. But they aren’t a panacea.
“ARMs are harder to obtain as the pricing is all over the place due to [government] restrictions that have not lifted or lightened, making them cost more,” Pava Leyrer, president of Northern Mortgage in Michigan, told Yahoo Money. Still, "borrowers are looking for any way to reduce payments and still get into homes.”
Janna is the personal finance editor for Yahoo Money. Follow her on Twitter @JannaHerron.