Mortgage Rates are Back Below 4% – Time to Buy or Refinance?
When it comes to fear of missing out, or FOMO, keeping an eye on Instagram, Facebook and other social media to see what your friends are doing may not cause as much anxiety as watching mortgage rates change daily and decide if you should jump in.
Rates on 30-year fixed-rate mortgages have fallen about three-quarters of a point in the past year, to below 4% as of June 6, 2019. Rates on 15-year fixed-rate mortgages have fallen about the same amount, to about half a point less than 30-year fixed. Adjustable mortgage rates are also down, though not as much.
The roller coaster ride of interest rate changes is plunging, and homeowners looking to refinance and house hunters looking for mortgage lenders for the first time want to take advantage of it and get the lowest rate they can before they start rising again — whenever that climb starts.
Low rates offer opportunities for buyers and owners, along with a few downsides that they should look out for when shopping for a mortgage. Here are some to consider:
As of June, about 5.9 million borrowers could see their rates drop by at least 0.75% by refinancing their mortgages — an increase of 2 million since May, CNBC reported in data from Black Knight, a mortgage software and analytics company. That’s the largest population of eligible candidates in nearly 3 years, equaling about $271 in savings per month per borrower.
The savings is big for first-time homebuyers also, and can add up to saving thousands of dollars over the life of a home loan.
A mortgage calculator can show the savings. Here are the monthly and total payments, and the total interest paid for a 30-year fixed-rate mortgage at 4.5% vs. 3.75% for a $200,000 loan:
Rate Monthly payment Total payments Total interest
4.5% $1,013 $364,814 $164,814
3.75% $926 $333,444 $133,444
Cooling home prices are also making homes affordable, and lower interest rates that create low monthly payments also make a home more affordable.
Home prices in March were up 3.8% annually, the first time growth has fallen below its 25-year average of 3.9% since 2012, according to Black Knight. When income is factored in, it takes 22% of the median income to purchase the average-priced home, the company says, which is far below the long-term average of 25.1%.
More buying power
Lower interest rates allow buyers to have the same monthly payment as they would with a higher rate, but can use the savings to qualify for a bigger home loan.
“When interest rates on mortgages drop, homeowners have more buying power,” says Elisa Uribe, a real estate agent at Golden Gate Sotheby’s International Realty in Oakland, Calif.
“Most home buyers are looking for a 30-year mortgage when interest rates are low and will work with a lender who not only provides them a low rate, but will offer them a competitive interest rate,” Uribe says.
If a buyer wants a house payment of $5,000 and has 20% down, a 3.99% interest rate on a 30-year fix would allow them to buy a home for about $970,000, she says. If rates were 6% under the same scenario, their buying power would be about $815,000.
Easier loan approval
Along with making a mortgage more affordable, lower interest rates can help some buyers have enough money to qualify for a mortgage that they wouldn’t qualify for otherwise.
“For the buyer, a lower interest rate can sometimes make the difference between mortgage approval and waiting until some debt is paid off to qualify,” says Michael Mesa, a loan officer and branch manager at Fairway Independent Mortgage Corp. in Lacey, Washington state. “It also can add a bit of payment relief fo the buyer, knowing that their home payment will not put them in a situation of being ‘house rich and cash poor.’”
Home sellers benefit too
Low interest rates also help home sellers, who may see more demand and more qualified buyers with fewer contingencies.
“For the seller, lower rates generally mean more qualified buyers to purchase their homes,” Mesa says. “The cost of obtaining a lower rate is less likely to be incorporated into the buyers’ request for seller-paid closing costs amount so sellers can sometimes net more proceeds than in a higher rate environment.”
Deciding when to refinance
The simplest way to determine if refinancing an existing mortgage is worthwhile is to calculate if the monthly savings in a mortgage payment offsets the fees to refinance and how long it will take to recoup that cost.
“If the time to recover the loan costs is 60 months and they are planning on selling in 48 months, they may not have spent their money in a most effective manner,” Mesa says.
The economy benefits
Falling interest rates benefits more than home buyers, owners and sellers, says Tenpao Lee, professor of economics at Niagara University in New York.
“The housing market will be more active and more people will own homes that would help fulfill the American dream,” Lee says the biggest benefits of falling interest rates. “Moreover, each home will generate a significant derived demand of everything, furniture, appliances, etc. The whole economy will move into a positive and healthier cycle to benefit all Americans.”
However, you’re taking on debt
No one knows when a housing bubble will happen, but don’t let low mortgage rates convince you to buy a home you can’t afford in the long run. The monthly payment may be affordable now, but there are other factors to homeownership that you should consider no matter where interest rates fall — property taxes, maintenance and insurance are just some of the starting costs.
The flip side to falling rates is that “Money is debt, so borrowers should always be cautious when borrowing because leverage in the system can create a bubble that may pop at any time, leaving the borrower with a debt liability and a devalued asset,” says Brian Ma, a real estate broker at Flushing Real Estate Group in Flushing, N.Y.
What happens when rates rise again?
Sooner or later, interest rates could rise and housing prices could fall, possibly leaving new homeowners with a home worth less than they bought it for. That kind of problem led to the 2008 housing crisis and recession.
“As a home buyer lower interest rates need to be approached cautiously because although lowered interest rates gives the impression your fully amortized lifetime payment on the loan will be low, the underlying asset itself will likely only continue to appreciate if interest rates continue their descent lower,” Ma said.
James McGrath, a real estate broker at Yoreevo in New York City, puts it another way: “The risk in low interest rates for buyers is everyone starts buying with lower monthly payments, pushing up housing prices and then as soon as interest rates rise, housing prices fall back down and you’ve lost a significant chunk of your down payment.”
Beware extremely low rates
As your parents may have told you, if something looks too good to be true, it probably is. Lenders with rates much lower than the norm may not be as harmless as they seem.
“Unfortunately with the lower interest rates more and more people are being duped by dubious lenders advertising low rates and making up for it by charging excessive fees and points,” says Jeff Richardson, a loan officer at Movement Mortgage in Wayne, Penn.
As with many other things you buy, shopping around for a mortgage with the best price and terms is a smart idea.