Mortgage rates drop, helping homeowners and buyers

One silver lining from trade tensions with China and fears about a slowing global economy – the same factors whipsawing the stock market this week – is that mortgage rates are heading lower.

That is helping homeowners and buyers alike.

People who bought in the last two to three years may pocket major savings by refinancing their mortgage, while those hunting for a new home may get a bit more spending power, thanks to lower rates.

The average rate on the 30-year fixed mortgage – the most popular for home purchases – fell to 4.01% last week from 4.08% the previous week, the Mortgage Bankers Association reported. That was the lowest level since November 2016.

The average rate for 15-year fixed-rate mortgages – a common refinance option – slipped from 3.48% to 3.37%, the lowest since September 2016, the MBA said.

Even lower rates are expected this week.

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“The Federal Reserve cut rates as expected last week, but the bigger influence on the financial markets was the beginning of a trade war with China,” said Mike Fratantoni, MBA’s chief economist said in a statement. “The result was a sharp drop in mortgage rates, which will likely draw many refinance borrowers into the market in the coming weeks.”

As trade tensions escalated, jittery investors poured money into longer-term U.S. Treasurys, considered safe investments, lowering their yield. Fixed mortgage rates typically follow the yield on the 10-year Treasury.

“We fully expect that refinance volume will jump even higher this week given the further drop in rates,” Fratantoni said.

Refinancing jumps

The volume of refinance applications increased 12% from the previous week and was 116% higher than the same week a year earlier due to the decline in rates, according to the MBA.

John Stearns, a senior mortgage originator at American Fidelity Mortgage Services in Milwaukee, started three new refinancings this week, two of which were inspired by falling rates.

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One homeowner has 16 years left on a 20-year mortgage. They are refinancing into a new 20-year at a lower rate and dropping private mortgage insurance, saving about $105 a month. A second owner has 17 years left on their 20-year mortgage and is refinancing into a new 15-year home loan, shaving two years off the life of the loan.

“It’s not just about a lower payment,” Stearns said. “If people are able to knock off a few years of the mortgage, that’s a good thing, too.”

Purchases stymied by market

Homebuyers who got pre-approved for a loan earlier this year may find they can qualify for a bit more than before, said Scott Sheldon, branch manager at New American Funding in Santa Rosa, California.

“With today’s reduction in rates at about 1%, people are getting about $35,000 to $40,000 of extra spending power … right now versus a few months ago,” he said.

The problem is that homebuyers in many areas still face a limited supply of houses. They may be pre-approved at a low rate for a mortgage, but can’t find a house to put it toward. The number of mortgage applications for purchases decreased 2% last week versus the week before.

Stearns, who closed last week on a purchase loan after the buyer was in the market for two years, is seeing new people come through the door looking to get pre-approved.

“But who knows when they’ll find something to buy,” he said.