Mortgage Rates Today
Mortgage rates currently sit at 3.75%, according to Freddie Mac’s most recent numbers. It’s nearly a 1% difference from the monthly average a year ago. The drop in rates caused a surge in refinancing over the last few months. And purchase activity ticked up as well.
The 2019 housing market has been one of low rates, high demand and limited supply—particularly on the lower-priced end of the market.
Will 2020 be more of the same? According to experts, yes and no.
According to Odeta Kushi, deputy chief economist at title insurance and settlement services provider First American, there’s “emerging consensus” that rates will remain low next year—likely somewhere between 3.7% and 3.9%, she says.
Forecasts from Freddie Mac and the Mortgage Bankers Association back this up, both predicting 2020 rates within this range. Fannie Mae actually predicts rates will clock in even lower, vacillating between 3.5% and 3.6% throughout the year.
Sean Hundtofte, chief economist for Better.com, says that thanks to these continued low rates, refinancing should remain a popular choice in the new year. And for homebuyers, he says, will “be able to afford more house than they would have otherwise.”
This factor have helped keep housing affordable despite low supply of houses for sale driving up prices. First American’s Chief Economist, Mark Fleming, explains the impact,
“Ongoing supply shortages remain the main driver of the performance gap as the housing market continues to face an inventory impasse – you can’t buy what’s not for sale.
However, an unexpected affordability surge, driven primarily by lower-than-anticipated mortgage rates, rising wages and favorable demographics, has boosted housing demand.”
Low mortgage interest rates have kept housing affordable throughout the country. If you plan on purchasing a home this year, act now while rates are still low!
How Current Mortgage Interest Rates Can Have a High Impact on Your Purchasing Power
The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power.
Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford to buy will decrease if you plan to stay within a certain monthly housing budget.
The chart below shows the impact that rising interest rates would have if you planned to purchase a home within the national median price range while keeping your principal and interest payments between $1,850-$1,900 a month.
With each 0.25% increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000). Experts predict that mortgage rates will be closer to 5% by this time next year.
No Bubble Here! How New Mortgage Rates Standards Are Helping
Real estate is shifting to a more normal market; the days of national home appreciation topping 6% annually are over and inventories are increasing which is causing bidding wars to almost disappear. Some see these as signs that the market will soon come tumbling down as it did in 2008.
As it becomes easier for buyers to obtain mortgages, many are suggesting that this is definite proof that banks are repeating the same mistakes they made a decade ago. Today, we want to assure everyone that we are not heading to another housing “bubble & bust.”
Each month, the Mortgage Bankers’ Association (MBA) releases a measurement which indicates the availability of mortgage credit known as the Mortgage Credit Availability Index (MCAI). The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.). According to the MBA:
“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.).”
The higher the measurement, the easier it is to get a mortgage. During the buildup to the last housing bubble, the measurement sat at around 400. In 2005 and 2006, the measurement more than doubled to over 800 and was still at almost 600 in 2007. When the market crashed in 2008, the index fell to just over 100.
Over the last decade, as credit began to ease, the index a little bit decreased to where it is today at 181.9 – still less than half of what it was prior to the buildup of last decade and less than one-quarter of where it was during the bubble.
Here is a graph depicting this information (remember, the higher the index, the easier it was to get a mortgage):
Though mortgage standards have loosened somewhat during the last few years, we are nowhere near the standards that helped create the housing crisis ten years ago.
Mortgage Interest Rates are Still Going Up… Should You Wait to Buy?
Mortgage interest rates, as reported by Freddie Mac, have increased by close to 0.25% over the last several weeks. Freddie Mac, Fannie Mae, MBA, and the National Association of Realtors are calling for mortgage rates to rise another 0.25% by next year.
Likewise, the Federal Open Market Committee recently voted “unanimously to approve a 1/4 percentage point increase in the primary credit rate to 2.75%.” Historically, an increase in the primary credit rate has translated to an overall jump in mortgage interest rates as well.
This has caused some purchasers to lament the fact that they may no longer be able to get a rate below 4%. However, we must realize that current rates are still at historic lows.
Though you may have missed the lowest mortgage rate ever offered, you can still get a better interest rate than your older brother or sister did ten years ago, a lower rate than your parents did twenty years ago, and a better rate than your grandparents did forty years ago.
How to Save Thousands of Dollars in Interest on Your Mortgage
One of the most common loans you can get to buy a home is a 30-year fixed rate mortgage. If the thought of paying for your home over 30-years seems daunting, here are some easy ways to shorten that term. Finally it will allow you to save money over the life of your loan.
Any additional payments to the principal amount (the original sum of money borrowed in a loan), helps to cut down the amount of interest that you will pay over the life of your loan and can also help to shave years off the loan as well.
When you make ‘extra’ payments toward your loan. The key is to let your lender/bank know that you want the extra funds to go toward your principal balance. You should remember that they will not automatically do this for you.
If you have a 30-year mortgage on a median-priced home ($250,000) with a 5% interest rate, you’ll be responsible for a $1,342.05 monthly principal and interest payment. Over the course of the loan, if you pay your exact monthly payment, you will have paid $233,133.89 in interest alone!
Paying a Little Extra Can Pay Off Big
- Pay an additional 1/12th of your mortgage payment every month
Benefit: In the example above, adding $111.84 to your monthly mortgage payment might not seem like a lot, but each year you will have paid one extra month’s worth of payments which will shorten the term of your loan by 4 years and 8 months, all while saving you $42,000 in interest!
- Pay an additional $50 per month towards your mortgage
Benefit: $50 might not seem like enough to make a difference on the term of your loan, but that small amount will save you over $21,000 in interest and will take over 2 years off the end of your loan. 28 years from now, you’ll be happy to pay off your loan that much sooner!
- Make one-time lump sum payments when you can
Benefit: If you find yourself with a little extra money after a yearly bonus, a tax return, or from investment dividends, paying that money towards the principal can cut your costs. This option, however, is less predictable than the extra monthly payments.
If you have higher interest debts, like credit cards, consider using any extra funds. So, you have to pay those debts down before applying that money towards your mortgage. Also, if you do not plan on staying in your home for more than 10 years, paying extra toward your mortgage might not make sense.
The Cost of Waiting
- Interest rates are projected to decrease in 2020.
- The higher your interest rate, the more money you end up paying for your home. And the higher your monthly payment will be.
- With interest rates still around 4.5%, now is a great time to look back at where rates have been over the last 40 years.
- The impact your interest rate makes on your monthly mortgage cost is significant!
- Lock in a low rate now while you can!
If you’re wondering what strategies would work best for you to shorten the term of your loan, let’s get together to answer your questions.