If you have a mortgage, this affects you, and even if you don’t, you may know someone who does. Market reaction to Coronavirus is having an impact on more than just stock prices. Mortgage rates have fallen, creating a financial planning opportunity for homeowners with a mortgage, or anyone considering a home purchase this home buying season. It could save a lot of money each month…
For a 1% drop in rates from 4.25% to 3.25%, we calculate a savings of at least $57 per month for every $100,000 of mortgage balance, and more if borrowers restart a new 30 year mortgage period. Assuming 20% equity on median home prices in Greater DC of $636,372, in MD at $310,744, and nationally for $266,300 (Source: Y Charts, Zillow as of Jan 31, 2020), a 1% drop in rates from 4.25% to 3.25% would save borrowers nationally about $141 each month and perhaps $288 each month in more expensive localities like DC.
Why the sudden drop in rates?
When investors rush into bonds in times of crisis they bid up the price of bonds which causes interest rates to fall. Here is how that works…
Already issued bonds have a contractual obligation to pay a fixed amount to the bondholder. When new investors are willing to pay more for old bonds that don’t pay any more than they did before, they accept a lower return on their new investment.
At the end of 2019, US government ten year bonds offered a yield of 1.92%. By midday on March 3rd, 2020 the 10 year yield fell to an all time low of just 0.91%. In that moment, investors were willing to lend to the US government for ten long years in exchange for a miserly 0.91% return. Ughhh. Since that writing, rates are hovering below 0.50% as of March 9th, exactly 11 years since the bottom in equity markets for the financial crisis.
Because all borrowers have to compete for funds, and all lenders have to compete for investment opportunities, yields for all kinds of bonds and mortgages tend to rise and fall together. As a result, mortgage rates are also near historic lows.
Whatever the trigger, when investors rush to safety, they drive down interest rates. Whether they were shocked by Britain’s decision to leave the European Union in 2016, the European debt crisis in 2012, the politics of the “Fiscal Cliff”, or even the end of the Mayan Calendar on 12/21/2012, the drop in rates created an opportunity, if only for a short time. Notice that rates didn’t stay low for terribly long, and trying to catch the exact bottom risked missing the opportunity entirely as rates spike sharply as the sense of crisis ends.
We have worked with several mortgage brokers over the years, and referred countless clients. One quoted very attractive rates (without points) 3.25% for a 30 year, and 2.875% for a 15 year. If you need a referral, just ask.
When you chat with any of these folks, be sure to consider the upfront closing costs and how long it would take to recoup that cost through monthly savings. Run it by us before committing, so we can help you think through the pros and cons of 30 vs 15 year financing based on your unique situation.