Purchase, Refinance, or Sit Out: How the Fed’s Rate Cut Will Affect Mortgage Costs
✦ 6-minute read ✦
Mortgage rates hit all-time lows after the Federal Reserve dramatically slashed the benchmark interest rate last week. What’s more, rates will probably go even lower if, as expected, the Fed keeps cutting rates. This poses an interesting question for home buyers and owners: purchase/refinance now or sit it out in the hope of getting a better deal later?
Mortgage Rates Likely to Keep Falling on Coronavirus, Fed
The Fed stunned the market on March 3 when it cut the benchmark interest rate by half a point from 1.75% to 1.25% over concerns about the impact of the coronavirus outbreak on the U.S. economy. This was the Fed’s first emergency unscheduled rate decision since the 2008 financial crisis. Investors are betting on an additional rate cut to 0.75% at the Fed’s next scheduled meeting on March 18 and 0.5% or lower by the end of 2020, according to CME Group’s FedWatch tool.
The average 30-year fixed-rate mortgage hit 3.29% on March 5, the lowest since government-sponsored mortgage corporation Freddie Mac began surveying lenders in 1971. Mortgage rates have been falling steadily since late 2018, when the Fed’s target rate stood at 2.50%.
The Fed’s target interest rate is one of two major benchmarks mortgage lenders look to when setting rates. The reason mortgage rates are lower now than in 2008 is because the 10-year Treasury bond yield – the other benchmark used by mortgage lenders – have also been falling dramatically over coronavirus fears. The 10-year Treasury fell below 1% for the first time ever following the Fed’s March 2020 emergency rate cut.
In short, the COVID-19 outbreak may be bad for people and the economy – but it is good from purely a borrowing perspective.
Is Now a Good Time for a Purchase Home Loan?
Based on the current trend, it may be worth waiting a little while longer before purchasing. That’s because interest rates are falling faster than home prices are rising.
If you’re in the market for a new home, it’s worth asking yourself two questions:
- Am I willing to wait to see if mortgage rates go down from current levels (and accept the risk that rates could stay even or go up)?
- If, as is likely, mortgage rates keep falling, to what extent might the benefits be offset by rising house prices?
The answer to the first question depends how much you feel comfortable with risk. It appears likely mortgage rates will keep falling in the near-term. However, they are already lower than at any time in history, so you may be content just getting a mortgage at current prices.
As for the second question, there are never any certainties about where mortgage rates and house prices will go. However, it’s still helpful to understand how you would be personally impacted if the trend of falling mortgage rates and rising house prices continues.
This example shows how the average home buyer would have fared in January 2020 compared to one year earlier. From January 2019 to January 2020, the median U.S. home value rose 3.8% and the average 30-year fixed mortgage rate fell 21.3%. A person buying a house at the median national price in January 2020 would have paid around $9,000 more for their home than 12 months earlier. However, they would have reduced their future interest payment liabilities by $32,730, resulting in a net gain of $23,730.
Home buyers are better off than a year ago – but will the trend continue?
|Median home value||$245,000||$236,000|
|Average 30-year fixed rate||3.51%||4.46%|
|Total interest payments||$121,240||$153,970|
Is Now a Good Time to Refinance an Existing Mortgage?
If you’re thinking about refinancing, then house prices are irrelevant; the only thing that really matters is where mortgage rates are headed. According to Black Knight, a company that collects data on the mortgage industry, the number of American refinance candidates (defined as people with 720+ credit scores and at least 20% home equity who could cut their current interest rate by at least 0.75% with a refi) exploded from fewer than 8 million in mid-January to approximately 14 million at the start of March.
If the average 30-year fixed-rate mortgage falls to 3%, there will be more than 19 million refinance candidates. But if mortgage rates quickly climb back to 4%, the number of refi candidates will be less than 7 million.
How to Secure the Best Mortgage APR as Rates Fall
Here are a few ways for home buyers to take advantage of falling mortgage rates.
- Lock in a rate. Searching for a house and a mortgage at the same time can be a stressful experience. If you need more time to find the right house, some lenders let their customers lock in a pre-approved rate for up to 90 to 120 days.
- Take an ARM. Adjustable-rate mortgages offer lower interest rates than fixed-rate mortgages for the first three to 10 years. If mortgage rates are the same or lower at the end of the introductory period, you’re in luck. And even if they end up going higher in that time, an ARM may be the best option if you believe you can pay the mortgage off early.
- Shop around. With any lending product, the golden rule is to shop around. Comparing 3-5 lenders is a great way of seeing what’s available right now and what type of rate you can qualify for with your credit profile.
As this article demonstrates, interest rates never stand still for long. Nobody can say for certain what mortgage rates will look like in a few months, but the evidence suggests they will be lower than now. Putting any personal worries about coronavirus aside, borrowers are in a win-win situation. Get a new mortgage or refinance an existing one at current prices and you’ll be getting a better deal than at any time in the last half-century. Wait a while longer and there’s a solid (but not guaranteed) chance you get an even better deal.
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