We’re living through unprecedented times, and a lot of things are being put on pause right now — but your plans to buy a home or refinance don’t necessarily need to be one of them. In fact, now may be a great time to take advantage of record low mortgage rates.
If you’re interested in purchasing or refinancing a home during COVID-19, here’s everything you need to know, including how the coronavirus has affected mortgage rates so far, how mortgage rates may change in the coming months, and more.
The Federal Reserve’s Response to COVID-19
Cutting Interest Rates
The Federal Reserve announced that they were slashing interest rates to 0.5% in an emergency rate cut on March 3, followed by an additional cut to 0% on March 15. These cuts were enacted to stimulate the economy once social distancing is over and everyone gets back to work again.
Interest rates are relevant to the housing market because mortgage rates tend to follow their lead. While this certainly doesn’t mean that mortgage rates will drop to 0% in the near future, they could likely hit record lows.
Purchasing Mortgage-Backed Securities
On the same day that the Fed reduced interest rates to 0%, it pledged to purchase at least $200 billion worth of mortgage-backed securities over the next few months. Just a week later, the Fed had already purchased half that amount, and by March 23, the Fed advised its plan to “support smooth market functioning” by purchasing as many mortgage-backed securities as necessary.
This strategy is known as quantitative easing and is designed to maintain consistent cash flow through the financial system. When mortgage rates fell significantly in late February and early March, mortgage lenders received a huge surge in refinance applications and quickly reached capacity. By purchasing mortgage-backed securities and stopping the cycle of falling bond prices, the Fed is ensuring that lenders have enough capital available for homebuyers and refinancers to borrow and trying to stabilize mortgage rates.
How COVID-19 Has Affected Mortgage Rates
Mortgage rates had already begun falling even before the first emergency rate cut due to the spread of COVID-19 in late February. By early March, U.S. mortgage rates had reached an all-time low — that’s right, even lower than the record set in 2012 — with the 30-year fixed-rate mortgage (FRM) dropping to 3.29%. For context, mortgage rates fluctuated between 4.5% and 5% at the close of 2018.
Forecasts for the rest of March expected mortgage rates to continue falling as the epidemic progressed, but they were mistaken: Mortgage rates increased significantly, with the 30-year FRM topping out at 4.113% by March 20.
This sharp increase had at least two catalysts: First, the surge in refinance applications overwhelmed lenders, causing them to raise rates to discourage applications until they could catch up. And second, bondholders began to sell their holdings to increase their cash reserves, decreasing bond and mortgage-backed security prices and thus increasing mortgage rates.
Rates were expected to fall again moving into April due to the Fed’s stabilization efforts, and so far, this has been the case. The 15-year FRM rate was 2.939% as of April 23, with the 30-year FRM back at 3.295%. The fact that the 30-year FRM hadn’t changed much from its previous week’s average of 3.348% suggests that the Fed’s efforts at stabilization are succeeding — good news for both homebuyers and refinancers.
Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) have responded favorably to the Fed’s actions as well, with ARMs expected to have lower rates during their next reset period and HELOC rates averaging 1.25 percentage points lower in mid-April than in mid-February.
What to Expect From Mortgage Rates in the Coming Months
Where will mortgage rates go from here? Given that the U.S. economy is in uncharted territory, it’s hard to say.
Housing authority predictions put the 2020 year-end rates at around 3.32%, suggesting that rates will continue at record lows for the remainder of the year. Could rates go even lower? It’s possible, but considering the complete uncertainty that we’re living in, they could also go up. Buyers eager to lock in an ultra-low rate may miss out if they wait to see what happens.
Home Ownership Matters, a site backed by the National Association of Realtors (NAR), points out that much of the volatility we’re seeing in the market right now, and particularly that related to interest rates, is due to uncertainty. As soon as we have more certainty about what will happen, interest rates could increase again — even if that certainty indicates that the pandemic will get even worse.
Considerations for Buying a Home During COVID-19
Now could be an ideal time for homebuyers to get a great rate on their dream home, but there are a couple things to keep in mind.
First, know that closing could be complicated or delayed (or just put on hold), depending on the social distancing requirements in your state. For example, in Washington state, in-person meetings are only permitted when they’re necessary for a customer to sign documents or view a property, open houses are not allowed, and viewings, inspections, appraisals, and walk-throughs are by appointment only and limited to two people on-site. Everything else must be done remotely.
Also be aware that fewer homes are being listed: While new home listings usually increase by around 50% from March 1st to the beginning of April, they decreased by 19% this year. But though you’ll have less options to choose from, you’ll also have less competition, as fewer people are buying homes right now.
To increase your chances of success, try the following tactics:
- Get preapproved to give the seller confidence that you’ll qualify for a loan and the sale will close.
- If possible, tell the seller that you’re flexible regarding the closing date.
[Related: Guide to Buying a Home in Seattle]
Considerations for Refinancing During COVID-19
Homebuyers are also taking advantage of the low current rates to refinance their existing mortgages, potentially lowering their monthly payments or reducing their loan term from 30 to 15 years. However, this may not be the best time for a cash-out refinance, as the equity in your home is a nice cushion in uncertain economic conditions.
Also keep in mind that, because of the current state of the market, you may not be able to lock in your rate when you apply. If your lender recommends locking it in later in the underwriting process, take their advice.
Get the Mortgage Guidance You Need
In fact, if there’s one thing people looking to buy or refinance a home during COVID-19 should know, it’s that now more than ever it pays to work with a professional. Online articles and guides won’t apply to this unprecedented economic situation, and even content specific to the current pandemic could quickly become obsolete if — or, more likely, when — the situation changes.
Featured image via Unsplash