Let The Good Times Roll – But For How Long?
The U.S is experiencing what experts are calling a post-pandemic residential housing boom, so could this be the right time for you to take advantage of the lowest mortgage rates that we have seen in a long time?
Will the rates go lower, or are they about to take an upward leap? The answers to these questions will help you to benefit tremendously in the current market, so let’s take a closer look below.
Changes in Mortgage Rates
In 2019, the average mortgage rates were 3.94%. In 2020, as a result of several factors linked to the pandemic, rates fell to below 3% for the first time in the history of mortgage rates, and they have remained low. January 2021 saw a historic 2.65% for a 30 year fixed mortgage.
Current Mortgage Rate
The average rate is now 3.100 % for 30 fixed-year mortgages, and 2.194% for 15 fixed-year mortgages. The changes from January to June 2021 have been incremental with the rates hovering around 3.000%.
At a 3% rate, and assuming principal and interest only, a home loan of $100,000 would bring your monthly payment on a 30 fixed-year term to $421.60, and $690.58 on a 15 fixed-year term.
The rise and fall of these rates may seem mysterious and subject to unknown forces, but mortgage rates are based on a variety of factors including mortgage bonds which are also known as mortgage-backed securities, MBS.
These mortgage-backed securities are mortgage loans that are bundled by lending institutions into groups of securities and sold in a secondary bond market.
Yields on Mortgage-Backed Securities
These securities are bought by investors who are looking for high yields on their investments. The yield is the difference in the price paid by the investor and the interest that is paid. Investors are always looking for the best yield.
What Happens When Prices Change for MBS?
When the prices drop for the MBS, the lender will raise interest rates. Conversely, when the MBS prices rise, lenders will drop their rates. National and worldwide events drive the prices of these bundled debt securities.
Additionally, changes in the benchmark interest rate by the Federal Reserve Board affect the yield on 10 year Treasury notes which then directly affects the mortgage rates.
Typically, when the Treasury yields fall, mortgage rates go lower. When the Treasury yields increase, then mortgage rates go up.
What Is the Effect of the Housing Market?
Mortgage rates are also affected by the supply and demand forces in the housing market. When there is an increasing supply of built or sold homes, then there is an increasing need for mortgages and the rates usually go up.
When there are fewer homes available, then fewer people are applying for mortgages and the rates tend to go down.
Currently, the U.S is experiencing a residential housing boom in almost every state.
There is a low supply of houses, but an increase in demand. Buyers are seeking to take advantage of the current interest rates, and more of the workforce is now working from home.
Are Rates Moving Up?
Although mortgage rates are hard to predict, current reports indicate that interest rates are going up incrementally. Two factors that have a direct bearing on interest rates, inflation, and economic growth, are rising.
Why Does Inflation Affect the Mortgage Rate?
Inflation is the gradual rise in the prices of goods and services and a decline in the purchasing power of consumers’ dollars.
An example of inflation is found in the lumber market, where lumber prices have risen by as much as 171% in 2021 as a result of high demand for, and a low supply of building materials.
Before the pandemic, the price of lumber per square foot was about $381, but hit a high of $1032 back in March, and has continued to go up.
Rising inflation usually results in increased rates. This occurs because the investors who purchase the above-mentioned mortgage-backed securities need to see significant returns on their investments.
A rise in inflation results in a decrease in purchasing power, so the interest rates have to go up to keep the investors motivated to buy the mortgage-backed securities.
How Does Economic Recovery Affect Rates?
The U.S economy shrank by 3.5% in 2020, as unemployment numbers rose to record highs, and thousands of businesses closed their doors.
However, economists have noted that we have entered a period of increased economic growth as evidenced by higher levels of employment and consumer spending, as well as the boom in the housing market.
As the number of people with improved purchasing power rises, so will the need for commodities and properties.
Where there is an elevated need for housing, the mortgage rates will rise.
This rise reflects the fact that lenders do not have unlimited capital. To ensure that they have the capital to lend in the future, the lenders will charge a higher rate.
How High Will the Rates Go?
Most economic experts believe that the rates will go up but will remain in the 3% range at least through July 2021, and possibly extend through the end of the year.
As a potential home buyer, your focus should be on purchasing when your needs and finances dictate it.
Factors That Affect Your Mortgage Rate
Mortgage rates are shown as an average. That means that some buyers get a higher rate, while others get a lower rate. Several factors shown below, affect the rate that you will receive.
Your Credit Score
The higher your credit score as a potential buyer, the lower the interest rate of your loan.
A credit score of 700 or above usually garners the best rates. Lenders consider a score of 740 or above as excellent credit; 700-739 is good credit; 630-699 is fair credit; 629 and below is poor credit.
It is a good idea to check and improve your credit score before trying to secure a mortgage. Consider working with an established mortgage lender to ensure that you get the best rates.
The Price of the Home and the Loan Amount
The loan amount is the price of the home plus any closing costs minus your down payment. Mortgage insurance payments may sometimes be added to your mortgage loan.
If your loan amount is very large or very small, you may pay a higher than the average mortgage interest rate.
Your debt-to-income ratio is a measure of how much of your income goes towards paying your debts each month. These debts are either secured, unsecured, revolving, or non-revolving debt.
Debts include things such as mortgages, rent, student loans, medical bills, personal loans, and child support.
The debt to income ratio is shown as a percentage and is calculated by dividing your total recurring monthly debt payments by your monthly gross income.
When applying for a loan, a debt-to-income ratio below 36% is preferable. No more than 28% should go to the servicing of your mortgage.
Your Down Payment
Putting at least 20% of the purchase price as a down payment usually ensures that you will get a lower interest rate on your loan.
A sizable down payment not only decreases the lending risk to the mortgage lender but also decreases your loan amount and monthly mortgage payments. However, you can also put down anywhere from 3- 12%.
If you put down a smaller amount as your down payment, you may end up with a higher interest rate. You may also have to pay mortgage insurance.
If you are having difficulty meeting some of the strict requirements necessary to secure a loan, you may want to consider working with a mortgage company that provides creative solutions.
The Length of the Loan
The length or duration of the loan refers to the amount of time within which the loan must be repaid. The length is typically 10, 15, 20, or 30 years. Most mortgages tend to be 15 or 30 years.
A 15-year mortgage which usually has a lower interest rate, but higher monthly payments, allows you to build equity faster in your home. You will probably have less money to save and invest monthly.
A 30-year mortgage may have a higher interest rate, but significantly lower monthly payments and does allow for more money left over at the end of the month to save, invest, or spend as you like.
What Is the Best Course of Action in This Current Market?
If you have been thinking of buying or selling your home, but have had reservations as the mortgage rates have fluctuated, it may be time to consider taking action.
If you believe that this is your time, we would love to speak with you about securing the best mortgage.
At RealFi Funding, we use state-of-the-art technology and our in-house expertise to transform your mortgage lending process and get you into your next home.
Contact us and let’s get the conversation started.
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