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Anyone that has been paying attention to the housing market has seen that mortgage rates are near historic lows. As of December 14th, 2021, the current average mortgage rate on the 30-year fixed-rate mortgage is 3.01%, the average rate for the 15-year fixed-rate mortgage is 2.281%, and the average rate on the 5/1 adjustable-rate mortgage is 2.773%.
To put these numbers in perspective, the average 30-year fixed-rate mortgage was above 5% in 2009. Many believe that a big reason for the recent housing boom is that mortgage rates are at such low levels. Homebuyers know that, in some cases,they will owe less than perhaps ever before on the debt used to purchase the home.
What Caused the Mortgage Rates to Decrease?
Low mortgage rates are available because of the current low interest rate environment. In March of 2020, the Federal Reserve dropped the Fed Funds rate to near 0% due to the Covid pandemic. This 0% Fed funds rate does not directly impact real estate lenders and borrowers, but it does have a trickle-down effect. Financial institutions now have the ability to borrow around that 0% rate. This gives them the ability to hand out low interest mortgages.
On the other hand, some could see inflation as a force that boosts interest rates up in 2022. Inflation decreases the purchasing power of dollars over time. Mortgage lenders generally have to keep interest rates at levels that can outpace inflation in order to ensure that their interest returns represent a real net profit. To put things into perspective, as of December 14, 2021 inflation is hovering around 7%. This is a pressure that could force lenders to raise mortgage rates.
It is important for homebuyers to keep long-term mortgage trends in mind. And what is the long-term trend? Mortgage rates have been declining for decades. As seen in the image below from housing wire, mortgages have been in sync with treasuries and the Fed Fund’s rate.
What You Should Know About Getting the Best Mortgage Rate?
There are different variables that determine the type of low interest rate mortgage a homebuyer will get. Keep these in mind for offers received that vary from the rates that were advertised.
Personal Financial Situation- An individual’s financial situation will be an important factor for determining what type of mortgage rate they get. Lenders tend to reward borrowers with the strongest financial resume. Borrowers that pay a larger percentage of a down payment will often be rewarded with better mortgage rates. Lenders usually start by looking at a borrower’s credit score. Then they tend to look at the repayment terms and the size of the loan. Your income and even the type of property you are buying can have an impact on the mortgage rate you are given.
Mortgage Rates Daily Fluctuations- The timing of a home purchase factors into the mortgage rate the home buyer can secure. Mortgages are like any market, there are fluctuations with the rates every day. As mentioned previously, there are larger external factors at play that affect the mortgage market, most notable factors are the bond market and the federal funds rate.
In fact, it is very rare for an individual to obtain the lowest interest rate mortgage that they see advertised. Advertisements do not take into account personal financial factors, location or market dynamics. It is helpful to keep up to date with average mortgage rates, but be cautious about receiving the exact rate being advertised.
Advertised Rates Are Never Guaranteed- It is important to recognize that many of the rates that have been advertised are just a collection of averages from surveys. None of these advertisements take into account the personal factors and market dynamics that have been discussed.
Many of the advertised rates tend to show the borrower the best-case scenario. These advertisements often disclose that the rates are based on a homebuyer with a 740+ credit score, 20%+ down payment, who is purchasing a single-family primary residence. In some cases, if the borrower does not have this strong of a financial situation, they can expect to be offered a higher mortgage rate.
Even if the borrower secures a mortgage rate that is as low as advertised, there are other obstacles to watch out for. Some lenders offer low rates that come with discount points. Discount points are fees that a borrower can pay to lower their mortgage rate. While these discount points may vary, it is standard for a payment of 1% of the total loan amount to lower a mortgage rate by 0.25%. Many popular lenders like Freddie Mac are factoring in discount point agreements into their advertised mortgage rates.
The current market environment has led to some of the lowest mortgage rates in history. While this is exciting for prospective home buyers, it may be a good idea to have an understanding of the mortgage market before agreeing to terms.
Article Topics
Mortgage Loans
Jackson is a consultant for a large American Asset Manager, notable clients include Morgan Stanley, Merrill Lynch, and Wells Fargo. He also writes on financial topics, including bitcoin, personal finance, and portfolio construction. Avid skier during the cold New England winters.
