In June 2020, average mortgage interest rates fell below three percent for the 30-year-fixed-rate mortgage – the lowest level in modern recorded history, according to Mortgage News Daily. What caused such a dip?
A stock market sell-off sent investors to the relative safety of the bond market, wrote housing journalist Diana Olick. Mortgage rates loosely follow the yields on 10-year U.S. Treasury bonds. As more bonds were purchased, the yields went down, and mortgage rates followed. But that’s not all that happened.
Also in June, the Mortgage Bankers Association’s Mortgage Credit Availability Index hit its lowest number since June 2014. The simple reason is that lenders don’t like uncertainty, so to secure those lower interest rates, borrowers are subjected to higher credit score qualifications (700 or higher per JP Morgan Chase), the temporary shelving of some loan programs (no new jumbo loans per Wells Fargo) and higher down payments (at least 20 percent). Other criteria lenders use to limit risk includes lower loan-to-value ratios and higher income-to-debt ratios from borrowers.
Yet, despite a rocky economy, June mortgage applications were up a whopping 13 percent over the previous year. Freddie Mac forecasts that interest rates will remain at or near record lows and that housing prices will moderate throughout 2021.
So, what does this mean to you, the homebuyer or homeowner? If you have good credit, steady employment, and a sizable down-payment, you’re in great shape to get or refinance a mortgage loan. In other words, nothing’s changed except tighter qualifications for higher-risk borrowers.
In mid-March, borrowing rates were slashed to banks to nearly zero percent and announced it would buy at least $700 billion in government bond purchases, channeling about $200 billion of the stimulus into mortgage-related bonds. Not since 2008 has the central bank made such a dramatic move to stave off the effects of a pandemic economic recession.
What does that mean to home buyers like you? Opportunity.
The Fed doesn’t set mortgage interest rates, but it does influence short-term borrowing and adjustable mortgage rates because banks follow the federal funds rate. Fixed rate mortgages tend to move with long-term Treasury yields, according to Bankrate.com. As more investors pile into Treasury bonds, the yield lowers, which means fixed rate mortgages will cost less.
According to Reuters, mortgage interest rates should remain low for some time. For example, the monthly payment on a $350,000 home purchased with a 20% down at 4% interest would be about $1,850. At 3%, the same payment would be about $1,700, allowing borrowers to buy homes more affordably.
The National Association of REALTORS® recently reported that only three percent of home sellers took their homes off the market in March in response to the coronavirus quarantines, which means there will be plenty of homes to choose.
Economic uncertainty typically causes home buyers to move to the sidelines, which can cause inventories to grow and housing prices to fall as well. The time to act is now while the costs of buying a home are dipping.
According to StudentLoanHero.com, high outstanding student
loans can keep you from qualifying for a mortgage loan, but here are two quick
ways you can improve your chances of getting approved.
Refinance Your Student Loan. Federal loans offer benefits
such as income-driven repayment options and access to loan forgiveness or
cancellation. You can consolidate your loans into one payment, but the interest
rate won’t change. If you refinance with a private lender, you’ll lose those
benefits, but you could go from paying 8% to as low as 3.25% interest, giving
you lower monthly payments that save you thousands of dollars.
Improve Your PITI and DTI. The lender wants to know one
thing – can you afford a monthly mortgage payment? Lenders use two ratios –
gross income to monthly payment and the amount of debt- to- income. PITI is
your total monthly payment including loan principal reduction (P), homeowner’s
insurance(I), property taxes(T), and interest rate(I). Divide your target
monthly payments by your monthly gross income and PITI should be no higher than
28% to 31%. DTI is adding all your monthly debt payments, including child
support, credit card bills and student loans and dividing the total by your
monthly gross income. The percentage should be no higher than 36% to 43%.
The results will tell your lender which loan programs will
best fit your needs and keep your monthly payments within the correct ratios.
Meanwhile, retool your budget to save more and spend less and use the
difference to pay off credit cards.