Homebuyers and homeowners in the refinance market now have an unprecedented opportunity to borrow at record-low mortgage rates.
An interest rate of less than 3% on a 30-year fixed-rate mortgage was hard to imagine before the pandemic. But the world is a completely different place now and the courses have been well below this level for weeks. Interest on 15-year loans has also plummeted. In fact, mortgage rates have repeatedly broken records by falling to new lows across the board.
If you’re on the fence about a refinance or looking to buy a home but aren’t quite ready, you might be wondering how long these low rates will last. Unfortunately, it is almost impossible to predict. However, there are some encouraging signs that rates could stay low for a while.
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Some key factors suggest that mortgage rates will remain low for a long time
A number of factors affect mortgage rates. The key to them is Federal Reserve action. And the Fed is taking two big steps to keep mortgage rates down.
1. Keep prices low
The overnight rate will stay between 0% and 0.25% for the foreseeable future – probably until inflation exceeds the 2% mark, which is very unlikely for the foreseeable future. Mortgage rates are not directly controlled by the Federal Reserve, but the overnight rate is the rate at which banks lend one another. When it’s low, lenders keep mortgage rates low and pass the savings on to consumers.
2. Purchase of mortgage-backed securities
The Federal Reserve is also buying mortgage-backed securities and has said it will continue to do so for a while. This is known as quantitative easing. Without going into too much detail, it ensures that lenders don’t have to keep mortgage loans on their books as the demand is in the secondary market. This makes credit more widely available, which in turn helps lower interest rates.
Mortgage rates also generally tend to follow the 10-year government bond yield, but this trend is actually slightly lower than the home loan rate. That wider spread between mortgage loan and government bond yields could mean that mortgage rates could fall even further.
These aren’t the only factors that suggest rates could stay near bottom for a while. The longer the economy remains sluggish, the more likely interest rates will remain low. And leading economists are now predicting a slower-than-expected recovery as Washington leaders have passed no more coronavirus stimulation laws.
Finally, mortgage demand is dampened by a lack of available housing, which also prevents interest rates from rising.
However, low prices can’t last forever
It’s unlikely that prices will rise anytime soon, but no one knows for sure. If the economy begins to improve or inflation rises, interest rates could rise quickly.
Fannie Mae and Freddie Mac, two government-sponsored mortgage lenders, will also collect a fee in December that could drive refinance rates higher. This fee has already been postponed once due to the outcry in the industry so there is no guarantee it will get through, but if it does it will affect your mortgage refinance rate.
The bottom line is that nobody has a crystal ball to predict the future. If you are considering buying a home or refinancing, make sure your finances are in excellent shape and compare prices with several leading mortgage lenders. If you qualify for a plan that you are happy with and can afford the monthly payments, get it now. Don’t wait hoping that the odds will keep dropping and you risk missing out on everything.