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The Federal Reserve cut short-term interest rates by half a percentage point on Tuesday in an attempt to protect the economy from further damage caused by the COVID-19 epidemic. The move may present options for mortgage buyers.
What does all this mean for home buyers? Or those who try to block a mortgage rate? For owners considering a refinancing? And for those who hold a variable rate mortgage?
Because the Fed has cut interest rates
Mortgage rates began to drop weeks before the Fed’s emergency rate cut. By lowering the rate on federal funds, the Fed is catching up, following the example of market forces that have set mortgage rates.
The new coronavirus identified at the end of 2019 has raised growing concern in the global equity and bond markets. Anguish stems from uncertainty about how the officially called COVID-19 outbreak will impact production, tourism, travel, the hospitality industry, and even consumer spending.
“Lower rates are likely to push refinancing higher and may also induce home buyers to shop. This is certainly the Fed’s hope,” says Danielle Hale, chief economist at Realtor.com. “However, if shoppers are reluctant to shop because they want to avoid contact with others, this could dampen home sales.”
The impact on mortgage rates
The Federal Reserve manages the interest rates used by banks to obtain loans from each other. It is a basis for how long-term interest rates move.
Although mortgage rates are not directly influenced by Fed rate decisions, they cannot resist the general direction of the bond market. Lenders use the 10-year treasury bill as a guide to loan prices, and yields have hit record highs.
Mortgage rates are likely to follow, at least in the short term. The 30-year loan is already approaching – and sometimes falling below – the all-time low of 3.31% (with 0.70 discount points) reported by Freddie Mac on November 21, 2012.
The news is also good for those who have or buy variable rate mortgages and domestic equity credit lines, which are driven directly by Fed rate cuts. ARMs are likely to see lower rates in the next reset period and HELOCs may drop half a percentage point in the next billing cycle or two.
What to know if you are:
Buying a home
If you are on the market to buy a house, you probably face competition from other buyers because there are not enough houses for sale to meet the demand.
There is only so much that lower mortgage rates can do to stimulate home sales. Mortgage rates and affordability aren’t the biggest challenges in today’s real estate market, says Hale. “The lack of options continues to be the biggest obstacle,” he says.
Here are the tactics that make you most likely to prevail in a hot real estate market:
- Get a mortgage pre-approval. A pre-approval letter gives sellers the certainty that you will be able to get a loan and that the sale will be successful.
- Limit contingencies, such as asking the seller to make repairs or pay closing costs.
- Let the seller know that you can be flexible on the closing date, if possible.
If the fear of COVID-19 makes you reluctant to visit homes but are busy buying this year, “now is the time to go on strike,” says Daryl Fairweather, chief economist at Redfin, an online real estate agent. “People who commit now will have an advantage over people who wait.”
Many homeowners are refinancing now. Lenders endure heavy workloads. You can do your part to lighten the load by submitting a complete application, with all the necessary documentation. Online applications will usually notify you if you have not provided all the necessary documents.
- Find out why you are refinancing to get the right loan. It could be to get a lower monthly payment, shorten the loan term, replace the variable rate mortgage with a low fixed rate loan, borrow more than you should in a cash out refinance or get rid of the FHA insurance mortgage.
- Buy more than one lender. You are more likely to get the best deal possible if you apply with multiple lenders. Each lender will provide you with an information document called a loan estimate. By comparing the loan estimates, you will be able to identify the best offer.
- Lock your rate long enough. During normal periods, a 30 or 45 day rate lock for a refinance is sufficient to close the loan on time. But when so many homeowners are refinancing at one time, it may be appropriate to get a longer rate lock. Seek assistance from your loan agent.
Be careful to get a cash out refinancing. “It might be tempting to take money, but especially if you’re worried about a recession in the future or about the safety of your job, it may not be the best idea,” says Fairweather. You want to have a pillow, instead of taking away all your equity, he says.