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Buying A Home The Most Affordable Since 2016: Low Mortgage Rates Give You Purchasing Power

September 17, 2020

Natalie Campisi 

On March 19, the average rate for the benchmark 30-year fixed rate mortgage spiked to 3.65%, nearly the highest level in a year. Since then, rates have steadily fallen—breaking records on their way down and making home loans cheaper. The drop in rates has been a boon to buyers who are facing rising home prices in many areas of the country and a shortage of housing inventory.

This week, 30-year mortgages settled at 2.99%, according to Freddie Mac’s Primary Mortgage Market Survey. That’s 56 basis points lower than this time last year, when rates hovered around 3.55%. A basis point is one one-hundredth of a percentage point.

Home prices have maintained a steady upward trajectory over the last eight years, rising annually by about 4%. However, prices saw their first drop in memory between the first and second quarters of 2020, as the coronavirus pandemic bore down on the economy.

That drop, along with July’s rock-bottom rates, have made buying a home the most affordable it’s been since 2016, according to a recent report by Black Knight, a mortgage technology, data and analytics provider.

Buying Power Is Up, Meaning Borrowers Can Afford More Home

The average sales price of a house in the second quarter of 2020 was $368,700. Without factoring in a down payment, insurance, taxes or applicable private mortgage insurance (PMI), the monthly payment at today’s average rate of 2.99% would be $1,552.47. In the same scenario, using last year’s average rate of 3.55%, the monthly payment would jump up to $1,665.94.

“Buying power is now up 10% year-over-year, meaning the average home buyer can afford nearly $32,000 more home than they could at the same time last year, while keeping their monthly payment the same,” says Ben Graboske, president of Black Knight’s data and analytics division.

The South continues to be the most budget-friendly region, with average home prices around $315,500. The Midwest comes in second place at $319,200, followed by the West at $459,900 and the Northeast at $622,900.

That buying power is showing, as mortgage applications to purchase a home jumped by 27% over last year’s rate, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending Aug. 14.

“Conventional purchase applications drove last week’s increase, while applications for government loans decreased,” said Joel Kan, associate vice president of economic and industry forecasting at MBA. “The housing market remains a bright spot in the current economic recovery.”

 

Mortgage Refinancing: The Leader in Home Lending

Homeowners keen to save money on their monthly housing costs refinanced at the highest level in seven years, according to ATTOM Data Solutions’ second-quarter 2020 U.S. Residential Property Mortgage Origination Report.

There were some 1.69 million mortgage refinances, a nearly 50% surge from the previous quarter and 100% higher than the same time last year. The total dollar volume of refinanced mortgages was $513 billion, the largest in nearly 17 years.

For homeowners who want to refinance, waiting on the sidelines for rates to fall lower can be a bad move, as there’s no predicting where rates are headed.

Recently, the yield on 10-year Treasurys jumped 14 basis points to 0.71%, portending higher mortgage rates in the near-term. The yields on 10-year Treasurys usually move in lockstep with fixed-rate mortgages, so if yields rise, usually rates rise, too. However, the gap between the yields and rates are still wide enough that yields have room to rise without causing a big spike.

Another thing to consider is that sky-high unemployment numbers, which total more than 67 million initial claims in the five months since the coronavirus emerged, does not bode well for the economy, which could help keep a lid on rates.

Most experts agree that it’s not a good idea to rate watch, that is wait for rates to fall lower, as unexpected events can propel rates skyward. If you can lock in a rate now, while they’re still at historic lows, it’s a good idea to do so.

How to Position Yourself to Get the Best Rate Possible

Homebuyers and those who want to refinance their existing mortgage should follow the same basic guidelines when it comes to capturing the lowest rate available: Make sure your credit score is in excellent shape, shop around and have your paperwork ready.

Borrowers with credit scores in the mid 700s and higher have the best chance of getting the lowest rates. Lenders will use your credit score to gauge risk—the higher the score the lower the risk. And lenders tend to reward low-risk borrowers with the most competitive rates.

Because of the pandemic, credit reports are free every week. So you can check your score to see where you stand. If you’re falling below that 700-mark, you likely still have time to improve your score as experts predict rates will stay low into 2021.

Next, start rate shopping. There are plenty of mortgage lenders to choose from, most of which are accessible from your computer. Simply go online and start looking.

Keep in mind, the interest rate is only one fee you’ll pay on your mortgage, there are also closing costs. The total cost of the loan is actually captured in the annual percentage rate, or APR. So a lender might advertise a 3% interest rate, but their fees add up to 0.35%, bringing your total cost to 3.35%. Meanwhile, another lender might advertise a 3.07% interest rate, but only charge 0.20% in fees, giving you an APR of 3.27%. Before you lock in a rate, make sure you know what the APR is, so you don’t end up paying more than expected.

Before you apply for a mortgage, be sure to get your paperwork in order. Basic requirements include your W-2 forms, recent pay stubs, identification, bank statements and proof of income other than employment, such as alimony payments, disability payments, investment and rental income.

 

 


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