What Do Low Rates Actually Mean?

Published on September 1, 2021 under Tips

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By now, you have probably heard that mortgage rates are at historic lows. However, it can be a little harder to get to an explanation of what this actually means. It's important to understand how this might affect you if you are buying or refinancing a home.

Are Mortgage Rates Really Low?

Mortgage rates are very low right now. In fact, as of the time of writing the average 30-year rate has dipped to about three percent. This is the result of a combination of economic and regulatory factors. Typically, rates would be closer to four percent.

Why Are Rates So Low?

To understand this, you have to understand what affects mortgage rates in the first place. There are three factors currently dragging mortgage rates down.

  1. Overall economic uncertainty as we emerge from the COVID-19 pandemic. The fact that recovery from the pandemic is not straightforward in terms of either epidemiology or politics is pushing rates back down.
  2. A low federal interest rate. The Federal Reserve has lowered the interest rate in order to help the uncertain economy. While they do not set mortgage rates and their decisions don't affect mortgage rates directly, they affect how much banks have to pay each other in interest.
  3. A lively housing market as the pandemic causes people to rethink where they live and what kind of house they want.

All of this is keeping rates low, and this may stay the case until the end of 2022.

How Does This Affect Homebuyers?

First of all, the interest rate is somewhat mitigating the fact that we are currently in a sellers' market. Low inventory and high demand means house prices are up. However, the lower interest rate affects the monthly payments, and may allow you to afford a lower loan.

Be aware that fixed-rate mortgages tend to have a slightly higher rate, and adjustable rate ones may change dramatically if interest rates do happen to go up significantly as the economy moves to full recovery. However, this is still a great opportunity to lock in a low interest rate, at least for a while.

It might mean that now is a good time to buy even if the market is favoring sellers. If you are selling an existing home, then it's the perfect time to move. But if you have always wanted to buy a home, now is a great time to talk to a lender about what kind of deal you can get.

How Does This Affect Refinancing?

It's more clear cut if you are looking to refinance to get lower rates, or even to get cash for an extension or emergency. This really is a good time to refinance. The general rule of thumb is that the best time to refinance is when the rates you are paying are one percent or more higher than the rate you can get. However, you should start looking at half a percent. This is much more likely to be true than normal.

However, you should also consider things like why you are refinancing (a definite no-brainer if you have enough equity to get rid of mortgage insurance payments) and what your credit score is. You should also check property values in your neighborhood. Increasing value may mean that you no longer have the desired 20% equity and it would be better to wait.

Mortgage rates being low means you can get a better deal on a mortgage or refinance, but you should still check all of the other factors, such as your credit score, debt-to-income ratio and equity. That said, now is a good time to look into buying or refinancing, to take advantage of historically low rates that are likely to increase by 2023.

Please note, by refinancing your existing loan, your total finance charges may be higher over the life of the loan.

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