Mortgage Rates Hit Historic Lows—But Why?
This fall, interest rates hit 3.7% for 30-year fixed-rate mortgages, which is the lowest they’ve been since 2016. For the sake of comparison, mortgages hit an all-time high in the 1980s, going over 18%. Fortunately, most of today’s homeowners have interest rates between 3 – 4.9%.
Interest rates have steadily declined since the 80s. Mortgage rates are at an all-time low, and many homebuyers are wondering why.
3 reasons mortgages are so low right now
But is this too good to be true? As demand increases for homes in the US market, why haven’t interest rates increased to keep up with demand?
Several factors play into these low rates. Learn why mortgage rates are so low right now and what that means for your finances.
1. The Federal Reserve is keeping rates low
Keep in mind that, although the Federal Reserve (Fed) has a lot of control over our economy, it doesn’t actually set mortgage rates. What it actually controls is the federal funds rate.
The federal funds rate sets a minimum reserve that all banks need to maintain in their system. The federal funds rate tells banks how much they can lend other banks to meet these reserve levels. If the Fed sets a high federal funds rate, banks have to cover those added costs somewhere, so they pass them on to consumers in the form of higher interest rates.
Fortunately, the Fed is keeping these rates low for the time being, affecting mortgage rates.
2. International investments are risky right now
Believe it or not, the international economy has a big impact on mortgage rates. Thanks to Brexit and our trade war with China, investors are looking for less risky investments.
A lot of people are choosing government bonds. As more people invest in government bonds, the demand increases, which lowers the yield for that bond. Since mortgages are directly affected by the bonds that back them up, increased demand in bonds drops mortgage rates.
3. Other factors
Although the Fed and bonds are the main contributors to record-low mortgage rates, it’s important to remember other factors play a part, too. This includes:
- Unemployment levels
- Housing conditions
What this means for homeowners and homebuyers
So, how do these factors play out in your finances? Whether you’re already a homeowner or you’re shopping for a home, there are 3 things to keep in mind.
1. It’s a great time to refinance
Current homeowners should jump at these low interest rates. If you locked in, say, a 4.5% interest rate when you bought your home, you could refinance and lower your interest by 1%.
That doesn’t sound like much at first, but if you crunch the numbers, that equates to thousands of dollars saved over the course of a 30-year fixed-rate mortgage.
2. You could afford a little more house
If you’re shopping for a home, these low interest rates affect which homes you can buy. With lower interest rates, you could buy a little more house for the same monthly payment. That means you may not have to compromise on certain features or perks, snagging the house of your dreams within budget.
3. Your credit score is still a big factor
However, just because interest rates as a whole are lower, that doesn’t mean you’ll get a 3% interest rate. Banks look at your credit score to determine the interest rate they can give you.
If your credit score is lower than 740, you probably won’t qualify for rock-bottom interest rates. It’s always a good idea to improve your credit and your debt-to-income ratio before house shopping so you get better rates.
The bottom line
Whether you love the home you’re in or you’re looking for your next house, now’s a good time to act on these low mortgage rates. Rates could go lower, but they could also increase. If you’re able to buy or refinance, consider making your move before 2020 to take advantage of better interest rates.
Ready to shop for a home before 2020? Get in touch with Ropal Realty to strategize your next move.