What’s Happening to Mortgage Rates?

Are mortgage rates low? Are they high? How will the COVID-19 virus affect them? Below, we answer all these questions and more.  

When buying a home, one of the most important factors in determining your budget is the interest rate you’re given on your mortgage. Not surprisingly, a higher interest rate means your monthly payments will be higher, while a lower rate means your payments will be lower. 

You may have heard recently that mortgage rates have fallen due to the COVID-19 virus. This is only partially true. To be fully informed, there are a few things you need to know: 

What is the impact of the COVID-19 virus on mortgage rates? 

The short answer is that mortgage rates are closely tied to the overall health of the economy. Generally, a strong economy means more demand for loans and more inflation (more on this below). That results in higher interest rates. Conversely, a weak economy means less demand and usually corresponds with lower interest rates. Earlier this month, when it became clear that COVID-19 would severely hurt the U.S. economy, mortgage rates began to fall very quickly. 

According to Freddie Mac, 30-year fixed rate mortgages briefly reached a record-low interest rate of 3.29% during the week of March 2nd, 2020. However, they have since increased and as of March 30th the average stands at 3.65%: 

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Source: Freddie Mac

The sharp drop in mortgage rates, followed by an even faster increase, is fairly unusual and indicates how rapidly things are changing because of the unpredictable nature of this global pandemic. 

What appears to have happened is that so many people applied for mortgages (and refinances) when interest rates dropped, that lenders were overwhelmed. It appears that lenders don’t currently have the capacity to process even more loans or applications. So they’ve raised rates to limit the influx of new applications. 

So… are mortgage rates low or high right now? 

Rates are still relatively low compared to historical levels throughout the 1970s, 1980s, and 1990s. If we zoom out on the graph, this becomes clear: 

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Source: Freddie Mac

From a long-term view, today’s rates appear to be quite low. However, no matter which way you look at it, this is a particularly volatile time to buy a home. 

Where will mortgage rates go from here? 

Nobody knows for sure what will happen to mortgage rates in the future. However, we can look at a few factors to better understand what the possibilities may be. 

Economic Growth: This is probably the most important factor. While it is important for people to socially distance and in many cases stay home to prevent the spread of COVID-19, this does mean that economic activity will drop off significantly. The only question now is how much this will hurt the economy. If the economy enters a recession and struggles throughout 2020, it’s possible that mortgage rates could go lower than they are right now. 

Federal Reserve Decisions: On March 15th, the Federal Reserve dropped the federal funds rate target to 0-0.25%, the lowest it can possibly go. While mortgage rates are usually correlated with the federal funds rate, in this case mortgage rates did not stay low after the Federal Reserve action. Instead they went up. As this year goes on, mortgage rates could follow the federal funds rate and go lower. But based on recent precedent, we can’t know that for sure. 

Housing Market: A final factor in all this is the health of the housing market itself. In some cases, when the housing market is hot and there is a lot of demand for mortgages, it can put pressure on mortgage rates to increase. On the other hand, a softer housing market with less demand can sometimes put pressure on rates to decrease. However, with all the uncertainty in the market currently and the volatility we’ve seen, it is hard to predict whether or how the housing market will impact rates this year. 

For anyone buying a home in 2020, this could be an unusually stressful time. But one thing is always true — and it’s that having more information to make your decision is only going to be helpful. We hope the information above can help guide you through this turbulent time.

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