In recent months, interest rates for a variety of mortgage products, including adjustable- and fixed-rate mortgages, have fallen to near-historic lows. What does this mean for you, the borrower? We have helpful answers for everyone from first-time buyers to long-term homeowners interested in refinancing.
Understanding the Rate Cut’s Impact on the Mortgage Industry
Mortgage interest rates are determined by a variety of factors, including individual data points like your credit score and the size of your down payment. However, general market factors do play a part in determining how low your rate can go. That’s why recent news of a .25% interest rate cut from the Federal Reserve is relevant to the mortgage industry.
According to Sr. Mortgage Specialist David Bunker, the interest rate cut primarily impacts those with adjustable-rate mortgages, and it may also help individuals with short-term debt like credit cards and auto loans. However, Bunker says, “longer-term mortgage rates, including 15-, 20- and 30-year fixed, have also dropped in recent months as the markets anticipated the Fed’s recent .25% cut.”
This means that whether you’re a prospective first-time home buyer or a seasoned homeowner considering whether refinancing is the right move, now is the right time to speak with a mortgage professional. Bunker advises that doing so can help you “discover what benefit lower rates can have for purchasing a home or refinancing out of a current mortgage.”
To Buy or Not to Buy? Don’t Wait to Take the Plunge
Interest rates are a frequent fixture in financial news, and as with many aspects of financial markets, these rates can fluctuate over time. This can make some homebuyers, whether they’re first-time buyers or homeowners looking to purchase a second property, feel a bit wary. When is the right time to take the plunge? If rates are falling now, does that mean they’ll continue falling? Will you end up regretting your timing and wish you’d held out for a better deal?
This way of thinking can ultimately be self-defeating. The truth of the matter is that it’s impossible to predict the future, so if you’re ready to buy now, you shouldn’t let the highly theoretical prospect of even lower future rates hold you back. Current rates are excellent for buyers, and that’s a golden opportunity you shouldn’t pass up.
“Current rates are near all-time lows, and this is a great time for home purchasers to take advantage of a recent drop in rates,” says Bunker. Low rates don’t last forever, after all, and according to Bunker, buyers who wait to buy in hopes of an even lower rate typically often miss their chance entirely. “They hold out for lower rates, and they miss the opportunity to lock in a low rate and payment for the long haul.”
One important thing to keep in mind with respect to interest rates is purchase power. As Bunker points out, when you use a recent .50% rate improvement as an example, buyers now have approximately $18,400 more purchase power at their disposal. So, if you were considering house hunting with a $300,000 budget six months ago, you could now raise your budget to about $318,400 with the same principal and interest payment. That’s a major difference—and it won’t last forever.
Waiting for a 1% Rate Improvement to Refinance? Rethink Conventional Wisdom
Similarly, borrowers sometimes miss the opportunity for a great refinancing deal due to a lack of proper perspective on timing. Some homeowners have been taught that they need to wait until they can lower their interest rate by at least 1% before refinancing makes sense, but according to Bunker, “there are many variables that make this simply not always the case, and frankly misleading.”
The decision to refinance should be made based on a number of factors, not just a change in interest rate. Refinancing can have a cash-flow benefit for homeowners, which can help improve your overall financial position. Further lowering your mortgage interest rate, even by less than 1%, can help you pay down debt with a higher interest rate than your mortgage. Bunker advises that “improving the interest rate by merely .75% on a $400,000 loan balance can lower your payment by $175 per month. Alternatively, the same client could keep their same interest payment but pull out $37,000 cash at closing with a cash-out refinance.” Either way, you’d be able to pay down your debt much faster—or pay it off entirely with a lump sum.
Additionally, refinancing now could mean that borrowers with adjustable-rate mortgages can lock in a steady and favorable fixed-rate mortgage at the current low rate. If your ARM is currently in its fixed period, that means the new lower rate won’t have a positive impact on your mortgage. Refinancing into a fixed-rate mortgage at current rates can set you up for better financial health in both the short and long term.
What This Information Means for You
So, it’s clear that the current financial climate offers a unique opportunity for borrowers of all kinds, from first-time buyers to homeowners looking for vacation properties or refinance opportunities. What should you do about it?
Bunker’s advice across the board is to get in touch with a mortgage professional, whether in person, over the phone or via email, and talk it out. There’s a lot of individual evaluation and strategy that supports every smart financial decision, and having an experienced mortgage professional in your corner can make it a lot easier to understand your options. Above all, though, don’t wait to find out if the time is right for you to purchase or refinance. Right now is the best time in years to make major mortgage decisions, so don’t hesitate to reach out to your local Directors Mortgage branch to learn more under the guidance of a seasoned Mortgage Specialist.