Mortgage Rates Below 3% Make This A Great Time To Buy, Refinance—If You Can Qualify
The new average interest rate on a 30-year fixed-rate mortgage broke below 3% this week—for the first time ever—to 2.98%, according to Freddie Mac’s latest Primary Mortgage Market Survey.
But whether most home buyers and current homeowners looking to refinance can qualify for this super low rate is another question.
What You Need to Qualify for a Mortgage Rate Below 3%
Although the advertised rates for many lenders are hitting the low 3% range—or lower—some borrowers might be surprised that qualifying for an ultra-low rate is challenging. Lenders have raised minimum borrowing requirements in response to the economic downturn and jump in unemployment.
“Essentially, this means that qualifying for any mortgage is going to be more difficult, but those who are able to get the lowest interest rates are those who are lower risk (higher FICO, lower debt-to-income ratio),” says Francesca Ortegren, data scientist at Clever Real Estate in St. Louis, Missouri. “These are borrowers who have more to put down on their home and are able to afford shorter loans,”
Americans have an average FICO credit score of 705, which is considered good. FICO scores between 740 and 799 fall in the very good category and an exceptional credit score is between 800 and 850.
“A score of 740 would certainly be enough to get the best rate available,” says Abe Kahan, president of home lending at Cleveland-based KeyBank. “In many circumstances, even a score of 720 would entitle a borrower to the best rate possible.”
The price of the home matters, too. Mortgages that exceed conforming loan limits tend to have higher rates, and banks are more hesitant now to approve jumbo loans, Ortegren says.
Rates Vary by Lender, Making it Important to Shop Around
Borrowers should also note that not only do rates vary among banks, but so does the annual percentage rate, or APR. The APR is the all-in cost of the mortgage. It includes the interest rate, as well as mortgage insurance, discount points and origination fees. While the interest rate is important, borrowers should look at the APR to get the true cost of the loan.
For example, the average rate on a 30-year fixed-rate mortgage at Bank of America is 3.375%, but the APR is 3.563%—which is the total cost of your mortgage. At Wells Fargo the rate for a 30-year fixed-rate mortgage is 3%, with an APR of 3.093%.
“Most banks are going to try to be competitive, but rates will certainly vary across banks and type of loans,” Ortegren says. “Quicken Loans, for example, quotes higher interest rates for VA and FHA 30-year mortgages than other government-backed conventional loans, whereas Wells Fargo doesn’t distinguish between FHA and government-backed loans up front.”
The bottom line is that borrowers should shop around. It’s important to know what the average interest rate is and what today’s borrower requirements are, as they have gotten stricter since the coronavirus emerged.
The good news is that borrowers are locking in low rates, according to an analysis of recent mortgages by Black Knight, a mortgage technology, data and analytics provider. In a sample of 30-year mortgage approvals from July 13 to July 15, more than 55% of borrowers locked in a mortgage rate of 3% or below.
“This suggests that locking in a 30-year rate that starts with a ‘2’ is certainly attainable, if not the current norm, for highly qualified applicants,” says Andy Walden, economist at Black Knight.
Buyers, Homeowners Who Refinance Could Save Hundreds a Month
As borrowing costs get less expensive, home ownership becomes more affordable for people facing a market with high prices and few homes for sale. Knocking off a couple of hundred dollars per month from mortgage payments could be the difference between renting and buying for some folks.
Similarly, lower rates expand the pool of borrowers who can save money by refinancing.
There are now 18.1 million refinance candidates—that is people who can save at least 0.75% on their current mortgage interest rate. The average refinance candidate could save $290 per month through refinancing, according to data from Black Knight. The aggregate savings for all potential refinancers would be $5.2 billion per month.
Along with saving money, this could be a good time for homeowners with an adjustable-rate mortgage to refinance into a new home loan with a lower, fixed rate. Likewise, homeowners who pay private mortgage insurance (PMI) might have enough equity in their homes to refinance and eliminate PMI.
“Rates at historic lows mean just about everyone can save money by refinancing,” Kahan says. “This could lead to a number of benefits, including reducing the repayment term of the mortgage, lowering the monthly payment, consolidating debt into a new mortgage, switching from an adjustable-rate mortgage to a fixed-rate mortgage, or taking cash out of the home for any future expenditures.”
Why Are Mortgage Rates Falling Now?
Indeed, this week is a landmark moment for homeowners, would-be borrowers and industry experts alike who have been anticipating a sub-3% record low since rates began dropping in mid-March.
Typically, mortgage rates move in lockstep with the yields on the 10-year Treasury notes, but the gap between the two widened when lenders could no longer meet the overwhelming demand of people looking to refinance and purchase earlier this year. Because of this, analysts have been expecting a drop in rates (and thus the spread narrowing) as financial institutions catch up with their backlog of applications.
“Mortgage bankers staff assume a certain production volume and so they tend to wait a little bit before making the broad hiring push. We also saw the market disruption with COVID-19 and other factors resulting in turmoil in the market generally. This delayed those hiring decisions further,” says James Baublitz, managing director at Compass Analytics. “Nonetheless lenders have been able to staff up, catch up, and are beginning to have the confidence to hire further. That in turn allows them to lower margins (their primary tool in controlling capacity) and thus lower primary rates to the street.”
Author: Natalie Campisi