If you’ve been watching the interest rate trends lately and are trying to guess when the right time is to either refinance or enter the housing market, you’re likely to make yourself frantic. Nationally, interest rates have been at historic lows for some time now and have recently started to creep up from the lowest point in January of 2021. Back in July 2019, 30-year rates dipped below 4% and in April 2020 they fell below 3%. As of April 8th, 2021, 30-year conventional fixed-rate loans are hovering right around 3.5% in the metro DC area.
The Housing Market
Anyone who has been looking for a home over the last 18 months to 2 years has seen just how fast the real estate market is moving, and the market is no exception. The housing inventory levels remain basically flat from last year, but the volume of homes sold and the sales prices are up 12% and 9% respectively. So there’s a lot of activity and the prices are being driven higher by this demand. Thankfully, the rates still remain low, but the question on everyone’s mind is, ‘how long will rates stay this low?’
The answer to that question is that no one really knows for sure.
Determining Mortgage Rates
Mortgage rates are not set or directly regulated by any government bureau or entity. They are instead, based on a number of factors, including, but not limited to:
- Treasury Bond rates,
- Housing demand/supply,
- The overall health and productivity of the economy,
- Unemployment rates.
When the economy is strong with low unemployment rates, typically rates tend to rise because the demand is strong. Conversely, during a recession or tumultuous time (like a pandemic), rates are likely to decline as the lenders make borrowing easier to attract the smaller group of potential borrowers.
Of course, we have all seen how monetary policies set by the Federal Reserve have impacted mortgage rates and the general economy in the past. When the Federal Reserve lowers the federal funds rate (the interest rate at which the Feds and other institutions lend money to each other) or buys chunks of Treasury securities, it tends to drive mortgage rates lower.
Key Points For The Home Buyer
Buying a home is, without much doubt, the largest financial decision that anyone will make in their life. With the median price of a home at $635,000, a small saving on the mortgage rate can make a big difference, both in the month-to-month expenses, and the overall amount of interest paid out over the life of the loan.
For example, on a $500,000 30-year fixed-rate mortgage at 2.67%, the monthly payment (P&I) is $2020, with a total interest paid of $227,229. That same mortgage at 3.3% will cost $2189 monthly with a total interest paid of $288,319.
So while the price of a home is important, equally if not more important is the interest rate of the loan. It is vital to realize that just because rates are so low, you may or may not qualify for that low rate. Lenders use a host of benchmarks to determine your actual rate, and it is based on many factors. If you are seriously considering a home purchase or even a refinancing, it is important that you reach out to a quality lender to research where you stand in the realm of their underwriting.
Some important factors determining your rate are:
- Credit Score. Yes, that credit score that most of us see on our bank statements and other financial websites. Once heavily shrouded in mystery, the FICO score has become a daily visitor in many of our financial lives. Each lender has its own parameters, but generally, the minimum to qualify for a mortgage is usually 620.
- DTI. Your debt-to-income ratio is a simple arithmetic ratio of how much you owe in all debt versus your income. Of course, the lower the number the better, but lenders like to see numbers in the 30-40% range.
- Down Payment. Having at least a 20% down payment will help you secure a lower rate, and also eliminate a Private Mortgage Insurance (PMI) payment every month. There are various government-backed loans as well as conventional loans that can be had with less than 20% however, but your rate will be higher than the average low rate.