The joy of lower interest rates
You’re probably following closely the cost of a tank of gas and are really happy these days when you drive in and fill up. But have you also noticed the drop in the price of getting a home mortgage? If not, you need to pay close attention.
Whether you’re in the market for a new home or are considering refinancing an existing mortgage, what goes on in the mortgage interest rate market is something that has an effect on all aspects of the economy. Overall the real estate market has been performing well below what was anticipated on a national level.
Slow moving home sales have the effect of also slowing down other indicators in the economy like the sale of furniture, appliances, hiring of workers in the building trades, as well as any service that is required to maintain a home. It’s one big interrelated system that trickles down from one level to another starting with the sale of a home.
Now, however, we may start to see the market spring back to life with interest rates dropping to levels not seen in almost two years. In mid-January the average rate on a 30-year, fixed-rate mortgage was 3.73 percent, the lowest since May 2013 per Freddie Mac. For burrowers with high credit scores, the rates can even be lower.
What this means to a buyer who applies for a $300,000 mortgage at a rate of 3.73 percent compared to what was considered a good rate towards the end of last year of 4.50 percent is the difference of $135 a month. This extra savings not only gives homeowners more spending power to pump into the economy as a whole, but also allows many burrowers to qualify for a higher mortgage on a more expensive home.
Lower rates could also benefit homeowners who want to refinance existing mortgages, which also could get a boost with the decision by the White House to cut the fees charged on certain federal loans. Banks point out, however, that there is a smaller pool of homeowners who want to refinance since currently two thirds of fixed-rate mortgages have interest rates of 4.5 percent or below. Lenders are aggressively calling their clients who have existing mortgages with interest rates over 4 percent and encouraging them to refinance at this time.
According to data from the Mortgage Bankers Association, mortgage applications rose 49 percent in the first week of January from the previous week and 30 percent from a year ago, so obviously at this point the lower rates are attracting homeowners to refinance. As we discussed last week, there are fees attached to new mortgages, and these fees also apply to refinanced mortgages.
In addition to bank fees, lenders will require new title searches, title insurance, survey, escrow account and insurance payments just as if you were purchasing a new home. The total cost of these fees vs. the length of time you plan to live in your home have to be considered against the monthly savings when deciding if a refinance is practical.
The latest drop in rates was unexpected coming on the heels of a typically slow period during the holidays, but if rates continue to fall, it will really start to get everyone’s attention. Maybe falling mortgage interest rates aren’t quite as exciting as falling gasoline prices, but they could have a larger big picture effect on your finances.