Mortgage Rates Lowest on Record

Last week, the average rate on the 30-year fixed rate mortgage (FRM) fell to 2.98%. This is the lowest level in almost 50 years of recorded rates. With the cost of borrowing being so cheap, now may be the perfect time to refinance an existing mortgage or consider a new home purchase. Contacting a mortgage lender or originator could be of benefit to improving your financial position.

How did we arrive at such low rates?

As you know, the coronavirus pandemic rocked the economy. With a dark economic forecast, the Federal Reserve had to aggressively respond. One key action taken by the Federal Reserve was to lower interest rates. Investors also contributed to reducing rates by fleeing risk assets and investing in safe-haven assets, such as Treasuries. Remember, when an investment is in demand, its price moves higher. For bonds, as prices rise, yields or rates move lower.

This is further illustrated by looking at the most popular debt instrument, the 10-year Treasury. The 10-year Treasury note is a loan you make to the U.S. Federal Government. Currently, the 10-year Treasury is around 0.62% which is low. Whereas a year ago, the yield was around 2.02%. This simply shows how much rates have dropped. This fall was fueled by both the Federal Reserve and investors buying up safe-haven assets.

Movements in mortgage rates should react in a similar way. Mortgages rates are traditionally based on the 10-year Treasury note, so they tend to move in the same direction. As you can see from the Freddie Mac chart below, as of 7/16/2020, the current 30-year fixed rate mortgage (FRM) is 2.98% compared to a year ago of 3.81%. This further supports why it might be a great time to refinance or make a new purchase.

Basics to consider before pursuing a new mortgage or refinance.

It is always important to be sure the terms of the loan make sense for your situation. Here are a number of items to consider:

Life of the loan. Decide the number of years you want to borrow. Traditional fixed mortgages are 10, 15, 20, or 30 years. Normally the rate is fixed for the length of the loan. Another type of loan is variable rate or ARM. This type of loan has a fixed introductory interest rate for a specific time before the interest rate turns variable every year thereafter. For example, a 5/1 Arm provides 5 years of the fixed introductory rate before the rate changes each year. The variable rate movement is based on current interest rates at the time.

Interest rate vs APR. Usually a borrower only pays attention to the quoted interest rate from the lender. However, the lender will also provide an APR which better reflects the total cost of the loan. Annual Percentage Rate (APR) will reflect the interest rate along with other expenses, such as closing costs and other fees.  Therefore, the APR rate will be higher than the interest rate.

Points. The term points may be mentioned by the lender. One point is equal to one percent of the principal amount you want to borrow. For example, 1 point on a $100,000 loan would be $1,000 dollars. Points are typically used to lower your interest rate and subsequent mortgage payment. Points can also cover closing costs. Points are negotiable and can be paid by the borrower, the seller or split.

Some of the biggest aspects to consider when refinancing is not just lowering the interest rate, but also reducing the years on the life of the loan. A best practice is to only consider refinancing if you can lower your interest rate by 1% or more. Also, you need to consider how many years of savings it will take to recoup the amount you will pay in closing costs for the refinance. For example, if you are only saving $500 annually from a lower rate, but pay $3,000 in closing costs, it will take 6 years to break even. Is it worth it? Only you can decide.  

In Summary

The Federal Reserve has taken many steps to lower interest rates due to the effects of coronavirus. Many economists and strategists feel it will be years before the Federal Reserve even considers raising rates. With the cost of borrowing being so inexpensive, now may be an appropriate time to review your existing mortgage or become a new home buyer.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.