The Federal Reserve cut short-term interest rates by half a percentage point on Tuesday in an effort to protect the economy from more damage from the virus outbreak. The move may present options for mortgage shoppers.
What does all this mean for home buyers? Or those looking to lock in a mortgage rate? For owners considering a refinance? And for those holding an adjustable-rate mortgage?
WHY THE FED CUT INTEREST RATES
Mortgage rates started falling weeks before the Fed’s emergency rate cut. By reducing the federal funds rate, the Fed is playing catch-up, following the lead of the market forces that set mortgage rates.
The novel coronavirus identified in late 2019 has been of increasing concern to the world’s stock and bond markets. The distress stems from uncertainty about how the officially named COVID-19 outbreak will impact manufacturing, tourism, travel, the hospitality industry and even consumer spending.
“Lower rates are likely to drive refinances higher and may entice home buyers out to shop as well. That’s certainly the Fed’s hope,” says Danielle Hale, chief economist for Realtor.com. “However, if buyers are hesitant to go shopping because they want to avoid contact with others, this could dampen home sales.”
THE IMPACT ON MORTGAGE RATES
The Federal Reserve manages the interest rates used by banks to borrow from each other. It’s a foundation for how longer-term interest rates move.
While mortgage rates are not directly affected by Fed rate decisions, they can’t resist the general direction of the bond market. Lenders use the 10-year Treasury as a guide to pricing loans, and the yields have reached record lows.
Mortgage rates are likely to follow, at least in the near-term. The 30-year loan is already approaching — and at times sinking below — the all-time low of 3.31% (with 0.70 discount points) reported by Freddie Mac on Nov. 21, 2012.
The news is also good for those with or shopping for adjustable-rate mortgages and home equity lines of credit, which are directly guided by Fed rate cuts. ARMs will likely see lower rates at their next reset period, and HELOCs could fall half a percentage point in the next billing cycle or two.
WHAT TO KNOW IF YOU’RE:
BUYING A HOME
If you’re in the market to buy a home, you probably face competition from other buyers because there aren’t enough homes for sale to meet demand.
There’s only so much that lower mortgage rates can do to stimulate home sales. Mortgage rates and affordability aren’t the biggest challenges in today’s housing market, Hale says. “A lack of options continues to be the largest hurdle,” she says.
Here are tactics that make you more likely to prevail in a hot housing market:
— Get a mortgage preapproval. A preapproval letter gives sellers confidence that you’ll be able to get a loan and that the sale will go through.
— Limit contingencies, such as requesting that the seller make repairs or pay your closing costs.
— Let the seller know that you can be flexible about the closing date if that’s possible.
If the fear of COVID-19 makes you reluctant to tour homes but you’re committed to buying this year, “now is the time to strike,” says Daryl Fairweather, chief economist for Redfin, an online real estate broker. “People who commit now are going to have an advantage over people who wait.”
Plenty of homeowners are refinancing now. Lenders are enduring heavy workloads. You can do your part to lighten the load by submitting a complete application, with all the necessary documentation. Online applications usually will let you know if you haven’t provided all the necessary documents.
— Know why you’re refinancing so you can get the right loan. It might be to get a lower monthly payment, to shorten the loan term, replace your adjustable-rate mortgage with a low fixed-rate loan, to borrow more than you owe in a cash-out refinance, or to get rid of FHA mortgage insurance.
— Shop more than one lender. You’re more likely to land the best possible deal if you apply with multiple lenders. Each lender will give you a disclosure document called a Loan Estimate. By comparing Loan Estimates, you’ll be able to identify the best offer.
— Lock your rate for long enough. During normal times, a 30- or 45-day rate lock for a refinance is sufficient to close the loan on time. But when so many homeowners are refinancing at once, it might behoove you to get a longer rate lock. Ask your loan officer for guidance.
Be careful of getting a cash-out refinance. “It might be tempting to take cash out, but especially if you’re worried about a recession in the future, or your job security, it might not be the best idea,” Fairweather says. You want to have a cushion, instead of taking out all your equity, she says.