Mortgage rates have dropped to record lows an amazing 14 times this year.
The average interest rate on a 30-year fixed-rate mortgage was 2.71%, the mortgage giant Freddie Mac reported on December 10. That’s reportedly the lowest level in about 50 years. In contrast, the rate was 3.73% a year ago on that mortgage. The 15-year fixed-rate mortgage was 2.26%. Rates on both mortgages remained flat this week from last week yet are still at record levels.
The tumbling mortgage rates most of the year has raised demand from people looking to refinance or potential home buyers looking to purchase. However, the downside is home prices have risen as the number of homes available for sell have dropped. Observers say that has created a buyer’s market and perhaps prompt sellers to seek higher asking prices, potentially erasing some savings from lower-rate mortgages.
“Despite persistently low mortgage rates, home sales have hit a wall. While homebuyer appetite remains robust, the scarce inventory has effectively put a limit on how much higher sales can increase,” stated Sam Khater, Freddie Mac’s Chief Economist stated last week.
“Unfortunately, the record low supply combined with strong demand means home prices are rapidly escalating and eroding the benefits of the low mortgage rate environment.”
So what should people pondering a home purchase or refinancing do?
Matt Frankel, a certified financial planner and mortgage analyst at The Ascent, offered tips to Black Enterprise on what Americans may do well to examine.
Things to consider before buying a new home or getting a new mortgage:
- Be sure to shop around. Different lenders have different interest rates, terms, and fees. It won’t hurt your credit to apply with a few different lenders, and a lower rate could save you thousands of dollars in the long run.
- Make sure you’re looking at annual percentage rates (APR) not just the loan’s interest rate. APR includes things like the origination charge you pay and gives a better picture of the true cost of borrowing money.
- It’s worth remembering that although mortgage rates are near record lows, home prices are at or near all-time highs in many markets. So, while it could be a great time to buy a home if you’re in the market, don’t do it just because borrowing is “cheap.”
- Just because you can get approved for a certain loan amount doesn’t mean you should. Stick with a mortgage payment you can comfortably afford, regardless of how much your lender is willing to let you borrow.
- If you can afford it, a 15-year mortgage is worth considering. Not only will you get a lower interest rate than with a 30-year loan, but you’ll pay off the house in half the time and your overall interest expense will be dramatically lower.
Things to consider before refinancing:
- Refinancing is generally worthwhile if you can reduce your mortgage rate by at least 75 basis points (0.75%). Remember, refinancing isn’t free—you’ll have to pay closing costs—so it’s important to make sure the monthly savings are worth the expense.
- On a similar note, refinancing is generally only worth it if the difference in rates makes sense and you plan to be in the house for long enough for the savings to offset the closing costs. In other words, if you’re planning to sell your home in another year or two, you might want to think twice before refinancing.
- Refinancing can save you money on your monthly payments, but it’s important to calculate how much interest you’ll pay over the entire loan. For example, if you have 20 years left on your current mortgage and refinance with a new 30-year loan, you could end up paying more in the long run, even though your payment drops.
- Be sure to check rates and fees at several different lenders. Buyers are often surprised at the difference in rates from one lender to another, especially when refinancing.
- Interest rates are typically higher for cash-out refinances than simple rate-and-term refinances, where no cash is received at closing. Taking cash out of your home can still be an affordable way to borrow money for home repairs and other expenses. But it’s important to know you might have to pay more than the industry average rate.