What Are the Current Trends in the Mortgage Market?
As of 12/7/2021, the average 30-year fixed-rate mortgage sits at 2.969%. The average 20-year fixed-rate mortgage is 2.760%, while the average 15-year fixed-rate mortgage is 2.211%. But what does this mean, and why should you pay attention to these numbers?
Mortgage loan company Freddie Mac says, “The tug-of-war between the economic recovery and rising COVID-19 cases has left mortgage rates moving sideways over the last few weeks. Overall, rates continue to be low, with a window of opportunity for those who did not refinance under 3%. From a homebuyer perspective, purchase application demand is improving, but the major obstacle to higher home sales remains very low inventory for consumers to purchase.”
Although housing prices remain high, low mortgage rates keep the industry moving at a fast pace. We’re currently experiencing a seller’s market (i.e., there’s a low supply and high demand for properties). Sellers may have the upper hand with many interested buyers, but homebuyers continue to take advantage of the low mortgage rates.
Why Do Mortgage Rates Change?
As the economy fluctuates, so does the mortgage market. You’ll see mortgage rates rise and fall every day depending on certain controllable factors, unemployment rates, and expected inflation and bond rates.
There are some factors playing into mortgage rates that consumers can control, like their credit score, down payment, and loan-to-value ratio. The higher the credit score, the less risk there is associated with that consumer, meaning they’re eligible for a lower mortgage rate. Having a credit score of 740 or higher will secure a lower mortgage rate. With a credit score lower than 620, it can be challenging to find loan options as interest rates will be at their highest.
Additionally, mortgage rates can fluctuate depending on the size of the down payment applied to a property. The higher the down payment, the lower the interest rates will most likely be, as there is less risk seen when the consumer has a larger stake in a property. Interest rates also change depending on the length of the mortgage; shorter mortgage terms often boast lower interest rates because the consumer is likely making greater monthly payments.
The final controllable factor that impacts a consumer’s mortgage rate is their loan-to-value ratio. The loan-to-value ratio compares the mortgage amount to the appraised value of the property. So, say your client makes a $40,000 down payment on a $200,000 property. The mortgage will be $160,000, meaning they’re borrowing 80% of the property’s appraised value, making their loan-to-value ratio 80%.
While it can be challenging to change any of the controllable factors above to secure the best available mortgage rates, arm your clients with this knowledge and encourage them to think long-term when it comes to their finances. After all, it’s better to have a modicum of control than none at all, especially when they can’t directly impact factors like inflation, bond, and employment rates.
Inflation and Bond Rates
Although the rate of inflation does not determine mortgage rates, they are tightly correlated. As inflation rises, mortgage rates tend to follow suit. As we know, when prices of goods go up, the dollar has less buying power; to compensate for this, lenders will demand higher interest rates to keep investors interested. Mortgage rates are determined by the bond market and have an inverse relationship; when bonds are expensive, mortgage rates are lower. This is also true in the reverse — when bonds are less expensive, mortgage rates are higher. When you start keeping an eye on this data, you’ll notice that mortgage rates trend alongside both inflation rates and bond rates.
Employment rates are one of the biggest signifiers of what will happen with mortgage rates. When employment numbers rise, you can expect mortgage rates to rise as well. Because of the layoffs and furloughs caused by COVID-19, the U.S. experienced a recession following the decline of economic activity. Although mortgage rates were already low, (recorded at 3.7% in January of 2020), they dropped to historic lows as the recession continued on, sinking as low as 2.7% for a 30-year fixed-mortgage rate in July of 2021.
Mortgage rates will vary from lender to lender, as some lenders are willing to allow more risk and have greater overhead costs. You may see higher rates from a company overwhelmed with business, as their employees may have reached their loan capacity. A company looking for more business will have slightly lower rates to draw in more customers.
It’s been predicted that there won’t be a substantial increase in mortgage rates in the coming months. Although we’ve seen inflation start to rise, this isn’t considered a problem following the drastic decline in inflation over the past two years. The market seems to be correcting itself after the long period of uncertainty brought about by the COVID-19 pandemic, and mortgage rates are trending at a slow increase.
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