When mortgage interest rates slide close to all-time lows — as they have since the Brexit vote — should one sit on the fence? Or pursue the financial opportunities that didn’t exist when rates were half a percentage point higher or more?
In July, according to Freddie Mac, 30-year fixed rates dropped to an average of 3.41 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, dropped to a stunning 2.74 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, hit 2.68 percent.
For potential first-time buyers or homeowners considering whether to refinance, or thinking about trading up or downsizing, rates this low could be worthy of attention.
Consider these illustrations of what a half percentage point cut in rate can mean, provided by Mike Fratantoni, chief economist for the Mortgage Bankers Association. For buyers purchasing a home costing $239,700 with a 5 percent down payment, a drop in rate from 4 percent to 3.5 percent will save nearly $100 a month in principal and interest. Those buying a house with the current median-sized purchase loan amount of $299,900 will save about $1,500 a year in principal and interest, or $125 a month.
For those living in metropolitan areas 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 needed to get a loan. A buyer seeking to purchase a first home for $241,000 this spring, at a rate of 4 percent with a 20 percent down payment, may have had the application declined because his or her income came close to what the lender required but didn’t quite hit the mark. However, at a 3.5 percent rate, a buyer doesn’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 by $2,626.
Savings like that matter not only to first-time buyers with modest incomes but also to the owners of moderately 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 month, 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. Competent loan officers have computer software that can quickly give buyers and owners the answers they’re after: How much of a rate decrease justifies doing a refinance? How long will it take to recoup the transaction costs via the monthly savings? Does a buyer’s income finally qualify them to buy the house they want?
Kenneth Harney is a syndicated columnist.