What do falling mortgage rates mean for you?

At the start of February, mortgage interest rates dropped to their lowest since 2016.1 Most people know this is good news, but not everyone understands exactly how it may affect them. Here’s a short explanation of the two big ways you may be able to benefit from falling mortgage rates.

Benefit 1: you may qualify for lower payments on a new mortgage

Whether you’re buying a new home or refinancing a current one, the lower your interest rate, the lower your monthly mortgage payment (all other factors equal).

For example, on a mortgage for $200,000, an interest rate of 4.5% (4.643% APR2) would equal a monthly principal and interest payment of $1,013, while a lower interest rate of 3.5% (3.635% APR2) would equal a lower payment of $898.

That’s a savings of $115 a month – or $41,400 over 30 years! The bigger the loan amount and the bigger the difference in rates, the bigger the potential savings.

Benefit 2: you may be able to afford a bigger loan and more home

The lower the interest rate on a new mortgage, the larger the loan you can afford (all other factors equal, once again). For example, a $200,000 mortgage with a rate of 4.5% (4.643% APR2) would have a monthly principal and interest payment that is about the same as a $225,000 mortgage with a rate of 3.5% (3.620% APR2).

Therefore, falling mortgage rates may allow you to buy a bigger home without increasing your monthly payment. The more rates drop, the bigger this benefit may be.

What this means for homebuying

If you’re planning to buy a new home, you picked a very fortunate time to do so. To ensure you can take advantage of today’s low rates, you need to lock in a rate with your lender in case rates increase later. At Draper and Kramer Mortgage Corp., we can lock your rate up to 90 days before your closing if you’re shopping for a home and up to 360 days before closing if you’ve already picked a specific property.

What this means for home refinancing

If you’re planning to stay in your home, it may be worthwhile to refinance your current mortgage. This may allow you to lower your interest rate and monthly payment and take advantage of other benefits such as removing mortgage insurance, getting out of an adjustable-rate loan or taking cash out for college, renovations or other expenses. However, you should weigh these benefits against the closing costs that come with refinancing your loan.

Your next steps

If you’re interested in learning what rate, loan amount and monthly payment you qualify for, get in touch to schedule a free mortgage consultation.

When refinancing an existing loan, total finance charges may be higher over the life of the new loan.

1 Based on the 30-year fixed-rate mortgage average as of February 6, 2020. Source: https://fred.stlouisfed.org/graph/?g=NUh

2 Annual Percentage Rate

Mortgage Rates Remain at Historic Lows

The latest report from Freddie Mac shows that the 30-year fixed-rate mortgage averaged 3.61% last week, slightly down from the week before (3.66%), and nearly 20 points lower than a year ago (3.80%).

This is great news for homebuyers who are dealing with rising prices due to a low inventory of homes for sale in many areas of the country. Freddie Mac expressed their optimism for the rates to remain low throughout the spring in a recent blog post:

“We expect mortgage interest rates to stay well under 4% as we head into the heart of the spring homebuying season. We’re predicting it to be the best one in 10 years, which should provide even greater opportunities for first-time homebuyers.”

Below is a chart of the weekly average rates in 2016, according to Freddie Mac.

Mortgage Rates Remain at Historic Lows | Simplifying The Market

Rates have again fallen to historic lows yet many experts still expect them to increase in 2016. One thing we know for sure is that, according to Freddie Mac, current rates are the best they have been since last April.

Sean Becketti, Chief Economist for Freddie Mac recently explained:

“Since the start of February, mortgage rates have varied within a narrow range providing an extended period for house hunters to take advantage of historically low rates.”

Bottom Line

If you are thinking of buying your first home or moving up to your ultimate dream home, now is a great time to get a sensational rate on your mortgage.

How Does Refinancing Work?

A refinanced mortgage represents a brand new debt and must be underwritten accordingly. As with a home purchase, there are three basic areas where a borrower is evaluated:

  1. Credit Score
  2. Income and Employment History
  3. Appraisal (loan to value)

Types of Mortgage Refinance

Mortgage refinances come in three varieties — rate-and-term, cash-out, and cash-in. The refinance type that’s best for you will depend on your individual circumstance.

Rate-And-Term Refinance

In a rate-and-term refinance, the only terms of the new loan which differ from the original one are the mortgage rate, loan term, or both. For example, in a rate-and-term refinance, a homeowner may refinance from a 30-year fixed rate mortgage into a 15-year fixed rate mortgage; or, may refinance from a 30-year fixed rate mortgage at 5 percent mortgage rate to a new, 30-year fixed rate mortgage at 4 percent. With a rate-and-term refinance, a refinancing homeowner may not walk away from closing with more than $2,000 in cash.

Cash-Out Refinance

In a cash-out refinance, the new mortgage may also have a lower mortgage rate or shorter term as compared to the original home loan. However, the defining characteristic of a cash-out mortgage is that the loan amount of the new mortgage is increased to account for cash back at closing of more than $2,000 (or a second lien is paid off and consolidated into the new first mortgage). The money can be used for debt consolidation, home improvement, college education etc.

Cash-out mortgages represent more risk than a rate-and-term refinance and, therefore, carry more strict underwriting guidelines. Cash-out refinances will have limitations on loan to value and often require higher credit scores.

Cash-In Refinance

With a cash-in refinance, a refinancing homeowner brings cash to closing in order to pay down the loan balance. The refinanced mortgage may also have a lower mortgage rate, or a shorter loan term, or both. There are several reasons why homeowners opt to do a cash-in mortgage, but the most common reason is to get access to lower mortgage rates which are only available at lower loan-to-values. Cash may also be used to buy the loan down to the conventional loan limit (from a more expensive Jumbo loan), or to remove private mortgage insurance (PMI).

Missed the Refinance Boat?

If you missed the 30 year fixed rates in the 3’s, you may want to consider a 10/1 Arm or a 15 year fixed mortgage refinance. The current 10/1 Arm and 15 year fixed rates are both still in the high 3’s, and would allow for tremendous interest savings vs. the current 30 year fixed rates.

I like the 10/1 Arm (with a 30 year amortization) as, historically, most folks are only in their loan (not their home) for 5-7 years. The 10/1 Arm gives you 10 years at a guaranteed fixed rate before it switches to a 1 year adjustable.

The interest savings on a $250,000 loan over 10 years would be aprox. $18,000 (3.75% APR vs. 4.75% APR). Even if you were in the home for 12 years, and the rate on the 1 year Arm went to it’s highest adjustment, you would still save money. Also, the 10/1 Arm is good for both conventional and jumbo loans up to $750,000!