What the Lowest Mortgage Rates in History Mean for You

The 30-year fixed rate mortgage average fell below 3% in July for the first time in history.  The drop in interest rates lead many home owners to refinance their mortgages as they looked to take advantage of this unprecedented opportunity.  So, are today’s rates truly a bargain?

Average rates on mortgages have bounced between 4-5% for the past couple of years, however they haven’t always been that low.  Since 1971 Freddie Mac has been tracking 30-year mortgage rates.  A 7.31% rate was the national average then but as inflation started to rise in the mid-1970s there was a surge in mortgage rates as well.  It may seem incomprehensible given today’s rates but in 1981 mortgage rates reached their U.S. average high at 18.63%.

Fortunately, inflation started to normalize by late 1982 and mortgage rates had a downward trajectory bringing them to a low in 2012 of 3.31%.  Since then 30-year fixed rates have risen modestly with the rate reaching as high as 4.94% in 2018.

What’s been the cause of the unprecedented low rates we’re seeing today?  Economic uncertainty.

The 30-year fixed mortgage rate typically follows the 10-year U.S. Treasure bond because most mortgages are packaged together and sold as bonds.  With the global health pandemic continuing to impact the global economy there has been increased volatility in the stock market which has led to a growing number of investors pulling money out of stock and into lower risk bonds.  The increased demand in bonds has led to a reduction in rates as companies and governments have a larger pool of people willing to invest which as also reduced mortgage rates.

However, possibly the largest factor in sending mortgage rates to unprecedented lows is the U.S. Federal Reserve and their stance to keep rates low by buying up mortgage-back securities.  According to Lawrence Yun, the Chief Economist for the National Association of Realtors, “we will see mortgage rates stay near this level for the next 18 months because of the significance of the Fed’s stance.”

What Benefit Do Current Home Owners Get from Low Rates?

The primary benefit homeowners can take advantage of with lower interest rates is to capitalize with a refinance of their current mortgage if they plan to stay in the home for at least a few years.  In fact, homeowners have been taking advantage of these rates for the last couple of months as refinance applications have surged.  Reducing the interest rate on a current mortgage can save both by lowering the monthly payment as well as the total payments over the life of the mortgage.

Based on your current mortgage rate and loan amount your total savings could be truly significant.  For every $100,000 in loan balance and 1% decrease in your interested rate you can expect to save a minimum of $55 a month over a 30-year mortgage or a total of $20,000.  This means on a $400,000 mortgage you would save $80,000. 

Now you must be sure to factor in any refinance costs which will usually run 1-2% of the loan mount.  It’s also important to factor in how many years you have left on your current mortgage as refinancing to a new 30-year loan could add a significant amount of time to your mortgage however there are shorter loan terms available and they come with the benefit of even lower interest rates.  For a more precise calculation of your potential saves reach out to your real estate advisor or mortgage professional to get specifics for your situation.

On top of the monthly and total payment savings of refinancing for home owners lower interest rates will benefit them in other ways as well.  Low interest rates increase home buyers purchase power which increases demand.  This is welcomed news if you are considering selling now or in the near future.  If you don’t have any plans to sell the benefit of increased demand for homes should continue to increase home prices and help the investment you’ve made continue to gain value.

What Benefit Do Low Mortgage Rates Provide Home Buyers?

As we’ve discussed lower interest rates will save you money on the monthly mortgage payments that come with a home.  This savings will also boost your budget when buying a home and give you increased purchase power.  If you’re budget is $2000 and interest rates are at 5% the maximum loan you can afford is $372,000. However, if rates are at 4% this increases your loan amount to $419,000 without increasing your $2000 monthly payment.  With rates dropping down to 3% this will allow you a loan amount of $474,000 without changing your monthly payment.

All of this is strictly due to the decline of interest rates and would put you in a better position to afford your dream home.  On the other hand, rising mortgage rates with have the reverse effect and will erode your purchase power.  Waiting to buy might force you to settle for a smaller home or one in a less desirable neighborhood.  If you’re planning to move acting soon will let you take advantage of historically low rates and get a phenomenal discount on your dream home.

Will Mortgage Rates Continue to Drop?

No one can know how low mortgage rates might fall or when they will start to rise again.  A lot will be dependent on the global health pandemic and the subsequent trajectory of the economic impact.

Freddie Mac and the Mortgage Bankers Association economists predict 30-year mortgage rates to average in the low 3% range into 2021.  However, economist at Fannie Mae see rates dripping to an average of 2.8% next year.

Most experts agree that waiting to take advantage of historically low rates could mean missing out on the deal of a lifetime.  Positive news about a vaccine or a faster than expected recovery of the economy could send rates back to pre-pandemic levels.  With rates at unprecedented lows, it’s unlikely there is a benefit to holding out for something better.

Tips for Securing the Best Available Mortgage Rate

A quick search online will show that while the average 30-year mortgage rate is around 3% it is possible to find interest rates that are even lower.  To take advantage of these ultra-low rates you’ll need to take steps to ensure these mortgage companies see you as the prime borrower that will qualify for these rates.

1.       Consider a 15 Year Mortgage

Taking a 15-year mortgage will lock in the lowest rate.  This will result in a higher monthly payment for most homeowners but if you can afford it the lower interest rate and shorter term will have you mortgage free in half the time.

2.       Boost Your Credit Score

The best interest rates are reserved for those with the best credit.  This is even more true as the economic downturn as caused lenders to be more cautious.  Unfortunately, there is no easy fix for bad credit but there are things you should look at doing prior to applying for a loan.

• Check your credit report for any inaccuracies and dispute them

• Catch up on any miss payments and continue to pay your bills on time

• Hold off on applying for any new credit

• Keep your credit card balances low and consider paying down debt

• Hold off on paying off debt or closing credit cards as this can actually adversely affect your credit score.

3.       Make a Larger Down Payment

The more equity you have in your home the better interest rate you will receive.  This is because the more equity in your home the less likely you are to default on the mortgage or go into foreclosure.  This decreased risk to the lender is passed on to you with a lower interest rate.  Additionally, if you can put down at least 20% you can avoid having to pay mortgage insurance and save additional money.

4.       Consider Paying Points

One of the closing costs associated with a new mortgage is discount point.  This is a fee you can pay the mortgage company and in return they will give you a lower interest rate.  It’s important to look at the brake even analysis of paying for these points as it often takes years to make this cost up, but the invest can pay off over time if you will be in the home long term.

5.       Shop Different Lenders

Rates, fees and terms will vary between lenders so make sure you check out at least a few.  Checking with several lenders will let you see who will provide the best deal.  Don’t stop with who is offering you the lowest interest rate however, as thing like fees and discount points have an impact on which deal will be the best for you.

With mortgage rates being at historic lows you don’t want to miss out on your chance to buy your dream home or refinance your existing home.  Consulting with a real estate advisor and mortgage professional will ensure you’re making the best decision and getting the greatest savings.