At the very same time we have the COVID-19 pandemic we also have historically-low mortgage rates. Has the virus caused the interest levels we’re seeing today, rates in the 2% range for many borrowers?
Freddie Mac reported that for the week of August 6th the typical 30-year mortgage was priced at 2.88%, the lowest rate since 1971. For buyers who have struggled with affordability — and for homeowners who have been looking for a way to reduce monthly mortgage costs — the new rate environment is one of 2020’s few bright spots.
At first it might seem that the virus has pushed down mortgage rates. COVID-19 dominates the economy and rates are down. That’s a fact but it’s only one part of a larger picture. The bigger point is that mortgage rates have been generally falling for nearly 40 years. What we’re really seeing is not new or different, it’s just more of the same. The big question, of course, is what comes next.
Even Lower Mortgage Rates Ahead?
As low as mortgage rates are today there’s an argument to be made that they might actually be lower without the virus.
Mortgage rates are the byproduct of supply and demand. Rates fall when there’s a lot of cash in the system and not much demand. Rates go up when there’s a lot of demand but little supply.
Right now there’s a lot of money in the system. Bloomberg reported in July that “the world’s pile of debt with a negative yield — bonds that cost investors money simply by holding them — has climbed to near the $15 trillion mark, prompting investors to take on more risk.”
Money can travel across borders electronically. One minute a dollar is in Europe or Asia and then suddenly it’s in Cincinnati or Phoenix. If you were an overseas investor and could put your money in the US market or somewhere else the US market might seem very attractive at this time.
US Savings Pile Up
It’s not just Europe and Asia that have a lot of excess cash. The same is true in the US and this time the virus is a big part of the reason.
The virus has divided the country in two. There are those with income and those without.
More than 55 million people have filed for unemployment insurance this year. According to Black Knight, some four million borrowers have entered into forbearance plans to defer some or all of their monthly mortgage payment.
At the same time millions of households have one or more individuals who continue to work and bring in an income. That income is a lot less spendable than it used to be as a direct result of the virus. Fewer places are open. People are cutting back on such things as commuting, work clothes, and expensive restaurants. The money not spent goes into savings.
“Americans,” says USA Today, are sitting on record cash savings amid pandemic and uncertain economy”
The paper reports that “the savings rate — the portion of monthly income that households are socking away — hit a record 33.5% in April before edging down to a still outsized 19% in June, Commerce Department figures show. Before the pandemic, Americans were squirreling away an average 7.5% of income.”
What do more savings really mean? A larger supply of money as well as pressure to reduce interest rates.
What’s the Best Strategy in Today’s Mortgage Marketplace?
Everyone has a different view regarding where they think mortgage rates are headed. You can hear arguments that favor rising rates as well as reasons why interest levels will surely fall.
Of course, no one knows what the future will bring — how many business plans had a section for “pandemic planning” in 2019? Here are some points to consider.
Availability. Let’s imagine that rates fall. That does not mean new financing will be available to every borrower. As rates go down we’ll likely see tighter lending standards. That’s actually what’s happened in recent months.
The reason is that lenders are unable to offset risk with higher interest levels so they look for other ways to protect themselves. Be prepared. Don’t be surprised if lenders insist on more down, a higher credit score, and bigger reserves. For the self-employed the guidelines have hardened. The FHA now requires lenders to re-check that the business is still operating 10 days before closing. An FHA lender might call just to check in or ask for the most recent signed contracts and invoices.
Application Fees. Be careful when considering a mortgage lender. Is there an application fee? How much? What do you owe the lender if you borrow elsewhere or the lender simply elects to decline your loan application? Get answers in writing.
Refinancing. Black Knight estimated at the start of August that nearly 17.8 million homeowners were solid refinancing candidates, individuals with at least 720 credit scores, 20% equity, and the ability to cut current rates by at least .75%. Avoid surprises. You can now check your credit reports at no cost on a weekly basis through April 21, 2021 at AnnualCreditReport.com. Fix errors and get rid of outdated items before applying for a mortgage.
Sales. Rates are so low that large numbers of potential home sellers are electing not to move. The reason is they like where they are and with lower rates can cut monthly costs. The National Association of Realtors said that in June available inventory was down 18.2% from the year before. Redfin reported that in July 54% of the homes it sold involved multiple offers.
Have your financial paperwork in order before looking for a home. Get pre-approved by a lender so you have a good sense of what’s affordable — and what isn’t.
To lock or not to lock? If you think rates have hit bottom and will now go up then consider locking-in your rate when you finance or refinance. If you think rates will fall then you might prefer to let your rate float.
For additional information shop around and speak with loan officers regarding specific loan options.