Due in part to coronavirus fears, mortgage rates are lower than they've been in decades. But that doesn't necessarily mean it's easier to buy a home.

Over the past month, mortgage rates in the United States have dropped to truly astounding numbers. According to some sources, 30-year fixed mortgages can now be found at less than 3%. In fact, MoneyWise, a digital personal finance publication, says that mortgage rates are at their lowest in nearly half a century. So what does it mean for potential home buyers?

For Sale sign in front of a house
Credit: Feverpitched/Getty Images

Some economists have pegged the rapid spread of COVID-19 as a primary cause of low mortgage rates. Since the first case of coronavirus was reported in December 2019, mortgage rates have dropped precipitously. And huge stock market sales have prompted lenders to lower interest rates to try to rescue their monthly figures.

But that isn’t the full story. For one thing, this phenomenon isn’t exactly new, despite the impressive lows. “In general, since the [2008] financial crisis, we've been in a low-interest-rate environment," says Melissa Stegman, a senior policy counsel at the Center for Responsible Lending, which focuses on mortgage issues. “It's not like suddenly rates are low. They've been low.”

Mortgage rates in 2000 were at an annual average of more than 8%, according to Freddie Mac. Following the financial crisis in 2008, they swung lower; in 2012, rates were hardly higher than they are today. These mortgage rates are closely tied to movement in the bond markets; in brief, when the stock market falls, panicked investors pile into bonds, which are more secure. But bonds and mortgages compete for the same investors, which means that as bonds rise, mortgage rates fall.

But while that's led us to today's shockingly low mortgage rates, it doesn’t necessarily mean that more people will be able to buy homes. “Even if mortgage rates are low, from our perspective and the research that we've done, mortgage credit availability is very constrained,” says Stegman. Low inventory and strict rules have made it very difficult for those with less-than-perfect credit to get mortgages. Mortgage availability is up since the dog days after the 2008 crisis, but they’re still low comparatively.

Stegman described many rejected mortgage-seekers as presenting an “acceptable” amount of risk. These are prospective homeowners who would have gotten mortgages, no problem, 20 years ago. Now? Not so much.

That means that the people who are really going to benefit from these new record-low mortgage rates aren’t those who are seeking to buy their first home: it’ll be homeowners looking to refinance. In fact, refinance situations are expected to double this year. The industry is even struggling to keep up with requests to refinance. At some banks, there are hours-long waits to even talk to a loan officer.

For current homeowners, now is a great time to investigate a refinanced mortgage, but that doesn’t mean that refinancing will work for everyone. “It's really important for the borrower to make sure the lender has run the numbers on the different scenarios and make sure that refinancing is really a benefit to the homeowner,” says Stegman. Interest, for example, is front-loaded in a mortgage, meaning that if you refinance, you might end up paying off interest for a few years before you even hit the capital.

There are also lots of fees associated with refinancing, and with a new craze for refinancing, those fees could be rising. Before refinancing, consider how long it’ll take to pay off those fees, which can sometimes be thousands of dollars. “Just the fact that there's a lower interest rate might not in and of itself make it worth it,” says Stegman. 

Most importantly, and despite the long waits you might encounter, be sure to shop around. Different lenders will present you with different options, and some might be better than others. So if you're thinking about buying a new house (or refinancing an existing mortgage), compare choices and thoroughly vet the numbers. It could save you money in the long run. 


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