Getty
The new average interest rate on a 30-year fixed-rate mortgage broke below 3% this week, for the first time, at 2.98%, according to the latest Freddie Mac Primary Mortgage Market Survey.
But whether most home buyers and current homeowners looking to refinance can qualify for this super low rate is another matter.
What you need to qualify for a mortgage rate of less than 3%
Although advertised rates for many lenders are reaching the low range of 3%, or lower, some borrowers may be surprised that qualifying for an ultra low rate is challenging. Lenders have raised minimum borrowing requirements in response to the economic downturn and rising unemployment.
“Essentially, this means that qualifying for any mortgage is going to be more difficult, but those who can get the lowest interest rates are those who are at lower risk (higher FICO, lower debt-to-income ratio),” says Francesca Ortegren, data scientist at Clever Real Estate in St. Louis, Missouri. “These are borrowers who have more to leave at home and can pay shorter loans.”
Americans have an average FICO credit score of 705, which is considered good. FICO scores between 740 and 799 fall into the very good category and an exceptional credit score is between 800 and 850.
“A score of 740 would be enough to get the best rate available,” says Abe Kahan, president of home loans at Cleveland-based KeyBank. “In many circumstances, even a score of 720 would entitle a borrower to the best possible rate.”
The price of the house also matters. Mortgages that exceed the conforming loan limits tend to have higher rates, and banks are now more hesitant to approve giant loans, Ortegren says.
Rates vary by lender, so it’s important to shop around.
Borrowers should also keep in mind that rates vary not only between banks, but also the Annual Percentage Rate, or APR. The APR is the total cost of the mortgage. It includes the interest rate, as well as the mortgage insurance, the discount points and the opening fees. While the interest rate is important, borrowers should consult the APR to obtain the actual cost of the loan.
For example, the average rate on a 30-year fixed-rate mortgage at Bank of America is 3,375%, but the APR is 3,563%, which is the total cost of your mortgage. In Wells Fargo, the rate for a 30-year fixed-rate mortgage is 3%, with an annual percentage rate of 3,093%.
“Most banks will try to be competitive, but the rates will certainly vary between banks and types of loans,” says Ortegren. “Quicken Loans, for example, quotes higher interest rates on VA and FHA 30-year mortgages than other conventional government-backed loans, while Wells Fargo does not distinguish between FHA and government-backed loans upfront.”
The bottom line is that borrowers should shop around. It is important to know what the average interest rate is and what the borrower’s current requirements are, as they have become stricter since the coronavirus emerged.
The good news is that borrowers are setting low rates, according to a recent mortgage analysis by Black Knight, a provider of mortgage technology, data and analysis. In a sample of 30-year mortgage approvals from July 13-15, more than 55% of borrowers blocked a mortgage rate of 3% or less.
“This suggests that a 30-year rate starting with a ‘2’, if not the current standard, is possible for highly-qualified applicants,” says Andy Walden, economist at Black Knight.
Buyers, homeowners who refinance could save hundreds a month
As loan costs become less expensive, home ownership becomes more affordable for people facing a market with high prices and few homes for sale. Allowing a couple of hundred dollars a month from mortgage payments could be the difference between renting and buying for some people.
Similarly, lower rates expand the pool of borrowers who can save money by refinancing.
There are now 18.1 million candidates for refinance, that is, people who can save at least 0.75% on their current mortgage interest rate. The average refinance candidate could save $ 290 a month through refinancing, according to Black Knight data. The added savings for all potential refinancers would be $ 5.2 billion per month.
Along with saving money, this could be a good time for homeowners with an adjustable rate mortgage to refinance a new home loan with a lower fixed rate. Similarly, homeowners who pay private mortgage insurance (PMI) may have enough equity in their homes to refinance and eliminate PMI.
“The record low rates mean that almost everyone can save money by refinancing,” says Kahan. “This could lead to a number of benefits, including reducing the mortgage repayment term, reducing the monthly payment, consolidating debt on a new mortgage, switching from an adjustable rate mortgage to a mortgage rate. fixed, or withdrawing cash from the home for any future expenses. “
Why are mortgage rates falling now?
In fact, this week is a landmark moment for homeowners, prospective borrowers, and industry experts who have anticipated a record low of less than 3% since rates began to drop in mid-March.
Mortgage rates typically move in tandem with 10-year Treasury yields, but the gap between the two widened when lenders were no longer able to meet the overwhelming demand from people looking to refinance and buy from earlier this year. Because of this, analysts have expected a drop in rates (and hence a reduction in the spread) as financial institutions catch up with the backlog of applications.
“The mortgage bankers staff take on a certain volume of output and therefore tend to wait a bit before putting in a huge hiring effort. We also saw the market disruption with COVID-19 and other factors that caused confusion in the overall market. This further delayed those hiring decisions, “says James Baublitz, managing director of Compass Analytics.” However, lenders have been able to increase staff, catch up, and are beginning to have the confidence to hire more. That in turn It allows them to reduce margins (their main tool to control capacity) and therefore reduce primary street rates. ”
