The Lowdown on Low Mortgage Rates
Mortgage rates are near historic lows and most economists believe they will stay that way for the foreseeable future. So if you plan to buy a house—or want to refinance—you may have some time to lock in a low rate.
Why are rates so low? Most recently, the unexpected British exit from the European Union played a role. The "Brexit" roiled financial markets and caused U.S. stocks to plummet as investors fretted about the potential impact of the referendum. When equity markets become volatile, investors look for safer alternatives, and none fits the bill like U.S. Treasuries, according to Keith Gumbinger, a vice president at HSH Associates, which tracks the mortgage market.
Backed by the “full faith and credit” of the U.S. government, U.S. Treasuries attract investors from all over the world because they are considered one of the safest investments. As their prices have risen, their yields—or the interest rates they pay investors—have fallen. The notes recently hit 1.468 percent on the benchmark 10-year note.
That's important because 10-year Treasury rates correlate with the 30-year mortgage rate. “A 10-year window is a pretty reasonable proxy for how long people own homes or more importantly stay in mortgages,” before refinancing, says Gumbinger.
As yields on Treasuries have fallen, the average rate for conforming 30-year fixed-rate mortgages, the most popular in the market, have also lowered. The rate was 3.56 percent as of August 1, according to HSH.com’s Weekly Mortgage Rates Radar. That's near the all-time lows for mortgage rates last seen in 2012, according to Gumbinger. Hybrid ARM, or adjustable rate mortgages, have fallen as well to 2.91 percent.
Low rates have helped fuel a recovery in the housing market over the past few years. Home prices in some markets have topped their pre-recession highs and as a result inventories are tight, says Greg McBride, chief financial analyst at Bankrate.com. While prices are expected to continue rising, the S&P CoreLogic Case-Shiller 20-City Composite Index, which measures the value of residential real estate in 20 major U.S. metropolitan markets, rose 5.2 percent in May, a smaller gain than in April when the index rose 5.4 percent.
How long will mortgage rates remain low? McBride expects rates to remain below 4 percent for the balance of 2016 partly because of concerns about economic growth. Gross Domestic Product (GDP) grew just 1.2 percent during the second quarter—less than expected. He also believes the Federal Reserve will be reluctant to raise rates in a presidential election year given future economic uncertainty.
Planning to Refinance?
With rates remaining low for the foreseeable future, if you’re thinking about refinancing, here are a few points to keep in mind:
Consider how much equity you have in your home. Ideally, you should have at least 10 to 20 percent equity along with a FICO credit score of 740 or better, according to Gumbinger. Borrowers, though, with credit scores as low as 620 could qualify for FHA loans through banks or credit unions. Of course, finding a financial institution willing to take a chance on someone with less than ideal credit can be a challenge, he said, adding these borrowers also need to buy private mortgage insurance, which can be pricey.
The size of your mortgage and the rate. A homeowner paying 4.75 percent on a $225,000 mortgage would see her monthly payment shrink more than 16 percent to $979.21, according to HSH’s calculator. Experts say it pays to shop around since rates can vary widely among financial institutions.
Fees. Consumers can choose to pay closing fees out of pocket or have them wrapped into the loan. Consumers pay for the added convenience through either a higher loan amount or a slightly elevated interest rate. Refinancing is still worth it for many consumers who choose these options.
Borrowers should expect to pay fees associated with their mortgage that cover everything from property inspections to loan origination to title searches equal to about 2 percent of their loan amount.
As HomeAdvisor notes, it pays to comparison shop since these fees can vary by state and by provider. For instance, home inspections cost between $277 and $377 while property surveys can cost $350 to $650 and appraisals can cost between $300 and $1,000.
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