When mortgage interest rates slide close to all-time lows – as they have since the Brexit vote – do you sit on the fence? Or do you ask yourself: Are there financial opportunities today that didn’t exist for me when rates were half a percentage point higher or more?
According to Freddie Mac, 30-year fixed rates are averaging 3.42 percent, just above the historic low of 3.31 percent set in November 2012. Fifteen year fixed rates, popular with homeowners seeking to become mortgage-free faster, have dropped to a stunning 2.72 percent. Five-year Treasury-indexed “5-1” hybrid adjustables, which carry a fixed rate for the first 60 months then morph into one year adjustables, are around 2.72 percent.
If you’re a potential first-time buyer or a homeowner considering whether to refinance or you’re thinking about trading up or downsizing, rates this low could be worth your attention.
Consider these illustrations of what a half percentage point cut in rate can mean. They were provided to me by Mike Fratantoni, chief economist for the Mortgage Bankers Association. Say you’re buying a home costing $239,700 with a 5 percent down payment. A drop in rate from 4 percent to 3.5 percent will save you nearly $100 a month in principal and interest. If you’re buying a house with the current median-sized purchase loan amount of $299,900, a half percentage point rate drop will save you about $1,500 a year in principal and interest or $125 a month.
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If you live in a metropolitan area such as Washington, D.C., New York, Boston, San Diego, Chicago or Miami, where median prices are much higher, the savings on a refinanced mortgage that flow from just a half a percentage point decrease in rate can run substantially higher.
There’s another impact of falling rates. They lower the amount of qualifying income you need to get a loan. Say you sought to purchase your first home for $241,000 this spring at a rate of 4 percent with a 20 percent down payment. Your application was declined because your income came close to what the lender required but didn’t quite hit the mark. However, at a 3.5 percent rate, you don’t need as much income to qualify. According to Danielle Hall, managing director of housing research for the National Association of Realtors, a half percentage point drop in rate reduces the minimum qualifying income to buy a house by roughly $1,000 per $100,000 in home price with a 20 percent down payment. On a $241,000 house, a rate cut from 4 percent to 3.5 percent would lower the qualifying income you need by $2,626.
Savings like that matter not only to first-time buyers with modest incomes, but also to the owners of moderate-priced houses and condos who are seeking to sell to those previously locked-out purchasers. A successful sale may then allow the sellers to buy another house – a nice win-win.
Not surprisingly, the rate declines are triggering boomlets in new mortgage applications, which rose by 14.2 percent last week, according to the Mortgage Bankers Association. The association’s refinancing index jumped even more – 21 percent – and the purchase loan index was 23 percent higher than the same week in 2015. Mike Eastman, vice president and senior loan officer at Washington First Mortgage in Fairfax, Virginia, told me “the phones are ringing” both for home purchase loans and refinancings. He described what an applicant with a high credit score in a $600,000 house in Virginia could save by opting for a “5-1” hybrid: $171 a month or $10,260 less in principal and interest during the first 60 months. That’s real money, he said, and “people should look at these (hybrids)” because they carry low rates and can be useful in a variety of financial planning situations.
How long are mortgage rates likely to remain at or near these levels? Nobody knows. But Sean Becketti, chief economist for Freddie Mac, says post-Brexit capital markets are “skittish” and “we don’t expect any meaningful, sustained increases in the near term.”
So take a hard look. Describe your situation and goals to one or more competent loan officers. They’ve got computer software that can quickly give you the answers you’re after: How much of a rate decrease do I need to justify doing a refi? How long will it take me to recoup the transaction costs via the monthly savings? Does my income finally qualify me to buy the house I want?