The Temptation Of All-Time Low Mortgage Rates

Posted: Jul 29, 2020 10:41 AM
The Temptation Of All-Time Low Mortgage Rates

Source: AP Photo/David Zalubowski

Mortgage rates have fallen to historic lows, propelling increased homebuyer demand and causing many young Americans to wonder if this is the right time to invest. 

While locking in a great rate on your mortgage sounds like a great move, there are some things to consider before taking the plunge. 

The Upside of a Downturn

According to Freddie Mac’s latest Primary Mortgage Market Survey, the rate on a 30-year fixed mortgage fell below 3% for the first time since 1971. This has led many experts to advise potential and current homeowners to take the plunge on a new or refinanced mortgage. 

As Abe Kahan, president of home lending at Cleveland-based KeyBank explains

Rates at historic lows mean just about everyone can save money by refinancing, This could lead to a number of benefits, including reducing the repayment term of the mortgage, lowering the monthly payment, consolidating debt into a new mortgage, switching from an adjustable-rate mortgage to a fixed-rate mortgage, or taking cash out of the home for any future expenditures.

Refinancing can save you hundreds, if not thousands, of dollars every year, and lower monthly payments may be the difference between renting and owning. Of course, you will have to qualify—and this might be harder in 2020. 

Who Can Qualify for a Low Interest Mortgage?

Before the housing crisis and the ensuing global financial crisis, it was too easy to get a mortgage. So much so that millions of Americans lost their homes or landed in extreme debt when home prices fell in 2006, leading to a wave of loan defaults. The collapse of the subprime housing market was followed by a banking crisis. 

While the housing market has since recovered, mortgage underwriting has become significantly more stringent to ensure that borrowers are able to settle their debts. This means that despite mortgage interest rates being the lowest in 50 years, not everyone is going to qualify. 

If you were planning to refinance your current mortgage or take out a new one, the bank is going to want hard proof that you are financially prepared. Some of the precautions banks are taking include raising credit score requirements, asking for a larger minimum down payment, or looking for high cash reserves. 

If You Do Qualify, Make Sure You Can Pay

Despite the stricter demands by banks, many Americans do qualify for relatively high mortgages. But this can be deceiving, especially with the current economic situation. Just because I can pay my mortgage today doesn’t mean I will be able to pay it tomorrow, and that is something to think about before taking on big debt. 

Money Under 30 founder David Weliver offered his thoughts on affordable mortgage payments:

Just remember that when you obtain mortgage pre-approval, lenders will likely approve you for a loan amount with payments of up to 30 or 35 percent of your pretax income. That may tempt you to take on more home than you should. Don’t just assume that just because the bank approved it, you can afford it. They are two very different things.

This is particularly important advice considering widespread unemployment and job insecurity since the COVID-19 pandemic hit. For nearly every week over the last four months, around a million Americans have filed initial unemployment claims. As of July 4th, more than 17 million Americans were unemployed. 

With new virus cases causing many states to roll back reopening, temporary layoffs and furloughs may soon become permanent job losses. 

And with stimulus benefits expiring, this will mean a serious money crunch for many Americans. Nouriel Roubini, a professor at NYU who predicted the 2008 mortgage crisis, is not optimistic about the housing market, despite attractive mortgage rates: 

It took us ten years—between 2009 and 2019—to create 22 million jobs. And we’ve lost 30 million jobs in two months. So when unemployment benefits expire, lots of people aren’t going to have any income. Those who do get jobs are going to work under more miserable conditions than before. And people, even middle-income people, given the shock that has just occurred—which could happen again in the summer, could happen again in the winter—you are going to want more precautionary savings. You are going to cut back on discretionary spending. Your credit score is going to be worse. Are you going to go buy a home?

The Illusion and the Reality

Homebuyers are being told that homes are more affordable now than ever because of the dramatically low mortgage rates. But as demand increases, it’s likely that this will also push up prices, leaving lower-income families out in the cold. 

This is already happening, with the National Association of Realtors (NAR) reporting a 2.3% increase in home prices from last year. If you are planning on taking a mortgage, it might be best to act quickly before housing prices get further inflated. And make sure you lock those rates to protect yourself from the inevitable rebound.

This begs the question—are we heading for another housing bubble? 

I certainly hope not. With the current regulations on underwriting mortgages, it is far less likely for banks to give huge mortgages to people that can’t afford them. On the other hand, the pandemic is something we’ve never seen before. 

With looming widespread unemployment and attractive mortgage rates, buyers may rush to purchase despite financial instability and that could be dangerous. As it is, Americans are struggling to pay their mortgages. 

According to CoreLogic’s latest report, the American delinquency rate on mortgages was the highest it’s been in years, reaching 6.1% at the beginning of the pandemic. When banks announced mortgage deferrals, this provided a lot of relief. 

But this break won’t go on indefinitely. When people have to start paying again, even if they have qualified and successfully refinanced their mortgage with the current rates, many may not make it. 

Closing Remarks

The announcement of sub-3% mortgage rates in the US is generating bullish buoyancy in the housing market, with many young people being encouraged to take advantage. If you have stable income and don’t expect that to change any time soon, and you’re standing on very solid financial ground, it may be the right move to invest in a house in 2020. 

On the other hand, with economic volatility comes risk, and taking on huge debt during risky times can be devastating if things deteriorate—this is what too many Americans experienced in 2008. I’m not sure if we are seeing the beginning of a bubble, but I would say that before buying, make sure you have savings and security first. Even if you qualify for a mortgage with fantastic terms.