For the second consecutive week, mortgage rates hit new lows. Buyers may have a hard time actually getting those rates, as lenders set stricter credit requirements.
Freddie Mac’s weekly report on rates shows the average interest rate for a 30-year fixed-rate mortgage were 3.03% with 0.8 discount points paid, for the week ending July 9. That’s a drop of 0.04 percentage points from last week’s 3.07%, which was also a record. Mortgage rates have remained below 3.3% for ten consecutive weeks. A year-ago, the 30-year rate was 3.75%.
“The summer is heating up as record-low mortgage rates continue to spur homebuyer demand,” said Sam Khater, Freddie Mac’s chief economist. “However, it remains to be seen whether the demand will continue if COVID cases rise to the point that it hinders economic growth.”
The average rate for a 15-year fixed-rate mortgage also decreased, down 0.05 percentage points to 2.51% with 0.8 points paid. The 15-year interest rate for the same week last year was 3.22%. Meanwhile, the average rate on a 5-year adjustable-rate mortgage was 3.02% with 0.3 discount points paid, up 0.02 percentage points from last week.
While buyer demand remains strong, lenders are tightening their requirements. According to a report released Thursday by the Mortgage Bankers Association, mortgage credit availability dropped 3% to its lowest level since 2014.
“Mortgage credit supply dropped again in June, as investors further reduced their willingness to purchase jumbo loans and those with lower credit score,” said Joel Kan, the MBA’s head of economic and industry forecasting. “Lenders are navigating a gradual economic and housing market recovery that is still facing headwinds from the ongoing COVID-19 pandemic.”
Home Buying Activity Swings Back Up
Mortgage applications went back into positive territory for the week ending July 3, according to data from the MBA. Home purchase applications increased 5% from the previous week, ending two consecutive weeks of decline. Overall, purchase applications were 33% higher than the same week a year ago. ( The loan application numbers are adjusted, taking the July 4th holiday into consideration.)
“Purchase applications continued their recovery, increasing 5% to the highest level in almost a month,” according to Kan. He went on to note that the average purchase loan size increased to $365,700, largely due to limited housing supply and higher home prices.
Refinances Also Increases
Refinance applications ticked up 0.4% week-over-week. Refinancing applications made up roughly 60% of overall mortgage applications and were 111% higher than what they were for the same week last year.
Mortgage Interest Rate Forecasts
On Thursday, the yield on the 10-year Treasury note opened at 0.651%, down 0.002 percentage points from Wednesday’s close of 0.653%. Before March, the note’s yield had never dipped below 1%, even during the Great Recession. The Ten-year Treasury is a key benchmark for mortgage rates.
Treasury yields have held at low levels as the Federal Reserve has indicated that it expects to keep the short-term Federal Funds rate at its current range of 0% to 0.25% through 2022. The Fed has also doubled down on its commitment to continue purchasing mortgage-backed securities and treasuries to help control market volatility and maintain liquidity.
Factors Affecting Your Personal Mortgage Rate
Not all shoppers can expect to get the very best mortgage and refinance rates. Credit scores, loan term, interest rate types (fixed or adjustable), down payment percentage, home location and the loan’s size will affect mortgage rates offered to individual home shoppers.
Rates also vary between mortgage lenders. It’s estimated that about half of all buyers only look at one lender, primarily because they tend to trust referrals from their realtors. Yet this means that they may miss out on a lower rate elsewhere. Last year, Freddie Mac reported that buyers who got offers from five different lenders averaged 0.17 percentage points lower on their interest rate than those who didn’t get multiple quotes. If you want to find the best rate and term for your loan, it makes sense to shop around first.
Interest Rates and Your Monthly Payment
More than other factors, your annual percentage rate on your real estate purchase will affect your monthly payments—whether you’re refinancing or buying a new home.
On a $200,000 home loan with a fixed rate for 30 years:
- A 4% interest rate = $955 in monthly payments (not including taxes, insurance, or HOA fees).
- At 6% interest rate = $1,199 in monthly payments (not including taxes, insurance, or HOA fees).
- At 8% interest rate = $1,468 in monthly payments (not including taxes, insurance, or HOA fees).
Refinancing to a lower interest rate could save hundreds of dollars a month if you kept the same loan terms. Shortening the loan term could negate your monthly savings but save thousands over the life of the loan. You can experiment with a mortgage calculator to find out how much a lower rate could save you.
Other factors besides interest affect how much you’ll pay in mortgage payments:
- Private Mortgage Insurance: PMI adds up to 1% of your home loan’s value to your payment each year. On a $200,000 mortgage loan, PMI at 1% would add $167 a month to your payment. Conventional loans do not require private mortgage insurance when the buyer makes a down payment of at least 20% or refinances less than 80% of the home’s value. FHA loans do not require PMI, but do require what is called a Mortgage Insurance Premium, which is paid throughout the life of the loan if you make a down payment of less than 10%. VA loans do not require PMI, MIP, or a down payment.
- Closing Costs: Some buyers finance their new home’s closing costs into the loan, which adds to debt and increases monthly payments.
- Loan Term: Choosing a 15-year mortgage instead of a 30-year mortgage will increase monthly mortgage payments but reduce the amount of interest paid throughout the life of the loan.
- Fixed vs. ARM: An adjustable rate mortgage’s monthly payment could change from year to year after the loan’s introductory period expires. A fixed rate loan’s payments remain the same throughout the life of the loan.
- Taxes, HOA Fees, Insurance: A monthly mortgage payment could also include homeowners insurance premiums, city or county property taxes, and Homeowners Association fees. Check with your real estate agent to find out how much they would add to your payments.
What Type of Mortgage Loan Do You Need?
First-time homebuyers can walk into a mortgage brokerage office or visit an online lender without knowing what kind of mortgage they need. But it’s always better to have an idea of what you’re shopping for, especially since you can’t control other factors such as home prices and current rates.
Mortgage loan options include:
- Conventional Borrowing: Shoppers with higher credit scores and higher down payments can get a conventional mortgage with either a fixed or adjustable rate. Mortgage interest rates can be low for qualified buyers.
- Subsidized Borrowing: The Federal Housing Administration and the U.S. Department of Agriculture help first-time homebuyers and shoppers in low-income areas buy homes by subsidizing their mortgage loans. FHA and USDA loans allow shoppers with lower credit profiles (a FICO score of 580) to still get affordable home financing. Subsidized loan restrictions include borrowing maximums and safe housing inspections. These loans are for single-family homes in most cases.
- Veterans Affairs Loans: Veterans and active-duty service members can buy homes with no down payment and no PMI through the Department of Veterans Affairs’ lending program. Banks make loans that are guaranteed by the VA. VA loans require a funding fee which could range from 1.4% to 3.64% for first-time homebuyers. Repeat VA borrowers or refinances require lower fees. Even with the fee, these loans can save veterans thousands of dollars a year.
- Jumbo Loans: Homes in high-value housing markets like San Francisco and New York City may not fit within a conventional or FHA loan. Jumbo loans can help because they exceed the conforming loan limits of Fannie Mae and Freddie Mac.
Will Today’s Mortgage Rates Save You Money on a Refinance?
You should consider refinancing your home loan if your current mortgage rate exceeds today’s mortgage rates by more than one percentage point. Refinancing fees and closing costs would cut into your savings. You also have to consider whether your credit score would qualify you for today’s best refinance rates.
Many online lenders can give you free rate quotes to help you decide whether the money you’d save in interest charges justifies the cost of a new loan. Try to get a quote with a soft credit check which won’t hurt your credit score.
You could enhance interest savings by going with a shorter loan term such as a 15-year mortgage. Your payments may be higher, but you could save thousands in interest charges over time, and you’d pay off your house sooner.
How to Find the Best Mortgage Lender
Homebuyers have dozens of choices for lenders. Your local bank or credit union probably writes mortgage loans with rates close to the current national average. A loan officer in your local branch could guide you through the process.
Online lenders have expanded their market share over the past decade. You could get pre-approved within minutes. Your loan amount combined with current mortgage rates could define your price range for homes prices in your area. Many online lenders also assign a dedicated loan officer to offer continuity as you shop.
Shop around to compare rates and terms, and make sure your lender has the loan option you need. Not all lenders write USDA-backed mortgages or VA loans, for example. If you’re not sure about a lender’s veracity, ask for its NMLS number and search for online reviews.
Should You Buy Discount Points to Lower Mortgage Rates?
Many lenders sell discount points. Buying discount points means you’d pay more up front to lower your mortgage rate which could save you money long-term. A mortgage discount point normally costs 1% of your loan amount and could shave 0.25% off your interest rate.
With a $200,000 mortgage loan, a point would cost $2,000. Buying two points would cost $4,000 which would be due, in cash, when you close the loan. These two discount points would translate into a 0.5% reduction to your interest rate.
Discount points could pay off but only if you keep the home loan long enough. Selling the home or refinancing the mortgage within a couple years would short circuit the discount point strategy. But if you stayed in the loan indefinitely, you’d reach a break-even point after which the discount points would save you more and more over time.
Often, spending cash on a down payment instead of discount points saves more unless you know for sure you’re keeping the loan for years. If a larger down payment could help you avoid paying PMI premiums, put the money toward your down payment instead of discount points.