Now's a Terrific Time to Buy (or Refinance) a Home
After the Federal Reserve approved a quarter-point increase in its target funds rate last December – the first increase since June 29, 2006 – the real estate industry, as well as mortgage borrowers, have been concerned about higher interest rates in 2016. So far, all that worry has been unnecessary. With mortgage rates remaining low, now is an excellent time to buy or refinance a house.Heading into Record Lows
Ever since the Fed raised its funds rate, the 30-year fixed-rate mortgage has been dropping. The reason? Looking for a safety play in a highly volatile and largely negative stock market, investors are flocking to the U.S. bond market. If stocks are selling [off], and if people are generally pretty panicked about the state of the global economy, bond markets are a natural safe haven, said Matthew Graham, COO of Mortgage News Daily. Popular opinion about rates moving higher only helped. Too many people were on one side of that trade, and it almost always makes sense to root for the underdog in those scenarios. For more on this topic, see How the Federal Reserve Affects Mortgage Rates.
At the same time, trouble in overseas markets – plus signs of weakness in the U.S. economy – have driven the yield on the 10 year-Treasury to its lowest level since 2012. Because mortgage rates tend to follow the 10-year Treasury (at least loosely), they have fallen as well. In February, the average 30-year fixed-rate mortgage dropped to 3.65%, down from a high of 4.01% at the end of December, according to Freddie Mac data from the economic research division of the Federal Reserve Bank of St. Louis. (In the last week of February, rates climbed to 3.85% and refinancing applications decreased 8% from the previous week, seasonally adjusted. But mortgage applications to purchase a home still increased 2%.)A Good Time to Buy
Mortgage interest rates, of course, have a huge impact on the size of your monthly mortgage payments and the overall cost of your home. Take a $250,000 30-year fixed-rate mortgage, for instance. At 4.01% (last December's high), your monthly payment would be $1,195 and you'd pay a total of $180,193 in interest, assuming you stick to the amortization schedule. At 3.65% (the average rate in mid-February) your monthly payment would drop to $1,144, and you'd end up paying $161,714 in interest over the life of the loan, a savings of $18,479 over the 4.01% rate. If mortgage rates continue to fall, as some analysts predict, the savings could become even larger.
Lower interest rates also make it easier to qualify for a larger loan, which means you could buy a more expensive home. That's because lenders look at what you can afford to pay each month towards a mortgage – and the lower the mortgage interest rate, the lower your monthly payment. Say you can afford up to about $1,300 a month on a mortgage. If mortgage interest rates are at 4.5%, you might be approved to borrow $250,000, since the monthly payment would be $1,267. If rates were only 3.5%, however, you might qualify for a loan up to $275,000, since your monthly payment would be about the same – $1,235. (See also What Are Your Options for Big-Money Mortgages? and Mortgages: How Much Can You Afford?)...or to Refinance
Low mortgage rates also make it a good time to refinance – especially if you bought 10 years ago when average rates were as high as 6.8%, or in mid-2000 when rates reached 8.64%. Both the Treasury yield and the mortgage rate now are in the neighborhood of early-2015 lows, said Sean Becketti, chief economist for Freddie Mac. These declines are not what the market anticipated when the Fed raised the Federal funds rate in December. For now, though, sub-4% mortgage rates are providing a longer-than-expected opportunity for mortgage borrowers to refinance.
Of course, you still need to do some math, taking closing costs into consideration, before deciding if refinancing makes sense. For a deeper dive into the subject, check out When (and When Not) to Refinance your Mortgage.The Bottom Line
Lower mortgage rates offer lower monthly payments and less interest paid over the life of the loan – and they may help you qualify for larger loans, which becomes especially important in markets with rising home prices. Since rates are low now – and may move even lower over the next few months – now is a good time to buy or refinance a house. One consideration to keep in mind: Just because you qualify for a larger mortgage doesn't mean it makes sense to buy a more expensive home. If you can manage with a smaller house, or one that's a little bit farther away from the city, you could pocket the difference and save it for a rainy day.