Why Are Mortgage Rates at an All-Time Low?

If you are in the United States and are in the market for a mortgage or you are looking to get a better deal on your current package, then there are plenty of things to consider. Over the past 40 years, mortgage rates have decreased significantly.

Back in 1980, you would be looking at an average 30-year fixed mortgage rate of over 18%. These days, that number is down to just 2.67%. This clearly showcases the differences between mortgages that were taken out not too far apart. This has not been a sudden swoop downwards. Instead, it has been a gradual downward trend over the past few decades.

Despite a turbulent year due to the COVID-19 pandemic, the housing market remained relatively strong in 2020. However, the pandemic has been a key reason for the dropping of rates. These ultra-low rates are not going to last forever.

In 2021, experts believe that the mortgage rates could remain steady at their current level for the short-term. As the pandemic situation eases, it likely could bring rising mortgage rates. This article will walk you through why mortgage rates are currently at an all-time low.

1. Cheap Cost of Borrowing

One of the main reasons why mortgage rates are at all-time lows currently is because interest rates are currently at extreme lows. The rates are even going into the negative in some cases. There is a lot of money out there available for people to borrow. As a result of the cost of borrowing being cheaper, mortgage rates can become more attractive.

There is the fear among some potential buyers that mortgage rates are going to rise again significantly in the next few years. If you get locked into a long-term fixed mortgage at these all-time low levels, you will not have to worry about future rises in mortgage rates. While there has been a downward trend in rates for some time, it eventually has to stop somewhere. The banks and mortgage companies are not going to give you loans without getting much in return.

A lot of people have been able to take advantage of these low rates by refinancing their current mortgages. They have likely been locked into a fixed rate that could be significantly higher than current mortgage rates. For example, if you got an average 30-year fixed mortgage in June 2006, you would have a 6.78% mortgage rate as opposed to the current level of 2.67%.

Over the course of time for a high-priced asset like real estate, a few percent difference in interest rates will be a significant sum of money. Therefore, it is a no-brainer for a lot of people to look into the possibility of refinancing their mortgages. There are numerous useful companies out there that can help people to do just that and assess their options.

2. COVID-19 Pandemic

Another catalyst for mortgage rates hitting all-time lows is the ongoing pandemic. While there has been an overall downward trend in rates over the past few decades, they had largely hovered between 3.3% and 4.8% between mid-2010 and the start of 2020.

However, once the pandemic started to take hold and turn into a serious situation in the US during March 2020, rates began to fall once more. They started the pandemic at about 3.5% and are now at 2.67% as of December 2020. When rates are already at pretty low levels, this presents a drastic drop.

With the pandemic leading to people and businesses wanting more space, there were more parties looking to buy during the start of the pandemic. The inventory of homes up for sale has been a bit low. Therefore, prices have increased due to the corresponding increase in demand.

If mortgage rates start to increase once more, this could lead to some buyers leaving the market. In November 2020, sales of new homes in the US dropped 11% to a five-month low. This reflects the setting in of the second significant surge of COVID-19 across the country. Some people are preferring to take a wait-and-see approach before selling their homes.

According to the chief economist in Freddie Mac, Sam Khater, rates should stay steady in 2021. However, the changing pandemic situation and rollout of the vaccines could be a key factor in any changes in the months ahead. Therefore, it can be worthwhile keeping an eye on the changing landscape if you are on the fence about your next move.

3. Declining Inflationary Pressures

There is a rough correlation between mortgage rates and long-term bond yields. The 10-year Treasury note is one of those yields. During the course of the pandemic, the markets were moving aggressively upwards and downwards at different times. During the onset of the pandemic, there was a significant sell-off of equities and people sought safer destinations, such as bonds.

As a result, this had a knock-on effect of mortgage rates also dropping. While the stock markets experienced strong comebacks, there were times when rising COVID-19 cases caused further turbulence and people became skeptical about the potential for the economy to recover sufficiently.

Naturally, when inflationary pressure increase, rates will likely rise. The vaccine rollout will allow businesses to get back to some level of normality. People will be back to work and there will be a ton of optimism in the air. With many people saving a lot of money during the pandemic, they will likely then start to spend these funds and stimulate the economy.

Once economic data or virus measures start to show meaningful results, mortgage rates will likely rise. They certainly look like they are not going any lower. Rising mortgage rates could then dampen the housing market rebound.

Conclusion

As you can see, there has been a significant mortgage drop in rates in recent times. Ultra-low interest rates mean that the cost of borrowing, in general, is lower than it has ever been. The COVID-19 pandemic has also led to a drop in mortgage rates, as well as the resulting declining inflationary pressures.

These mortgage drop in rates are not going to last forever. It looks like the subsequent economic recovery post-pandemic will lead to a rise in mortgage rates. Homeowners will need to keep a close eye on economic recovery data.

Tons of people have taken advantage of the mortgage drop in rates in order to refinance their existing mortgages. Countless people have secured significant improvements in how much they have to pay on their homes. This process can be made simple and straightforward when you use the best mortgage companies. These include AmeriSave, Figure, and Credible.

The mortgage drop also led to more people looking to buy homes. While current inventory is a bit low, there are plenty of people looking to take advantage of the low rates.

If you are thinking about buying real estate, now is possibly a good time to do so if you want to secure a low mortgage rate. Your money can be put to better use than simply paying your rent each month. These funds might instead be used in an efficient manner to finance your new home.

Andrew Omalley Andrew Omalley Last update:
Andrew is a freelance writer who has been crafting valuable pieces of content relating to personal finance for more than five years. Previously, he studied Economics & Finance at university and he has professional qualifications relating to financial advice.