Today Freddie Mac reported an average 30-year fixed mortgage rate of 3.98%. That’s up from a recent low of 3.76%. It appears average rates will break the 4% mark when Freddie Mac reports again next Thursday. Many borrowers are already receiving rate quotes above 4%.
Will this important milestone scare away homeowners? Is a rate of 4.125% that much different than 3.875%?
Whether it makes sense or not, the magical sub-4% rate has a psychological effect on home buyers and those wanting to refinance.
“Psychologically, this is huge. It’s a mental thing,” says Chuck Harvey, mortgage loan originator with 1st Rate Mortgage in Draper, Utah.
But when someone calls his office and asks him, “What are your rates?” he says it is so much more complicated than just throwing out a number.
“I ask them what rate they want,” he says.
There are so many questions to ask such as: Are you buying a primary residence or a condo? What’s your credit score? How much are you putting down? What kind of program are you using – such as a first-time homebuyers down payment assistance program? Are you a veteran?
Just because a mortgage company or bank is advertising that it has rates below 4 percent or Adjustable Rate Mortgages under 3 percent doesn’t mean everyone qualifies for those rates.
When rates are hovering below 4 percent, it does start to make people think about refinancing or buying. But Harvey doesn’t feel like that ¼ of a percentage is a huge thing.
“Some of my clients want to pay discount points to get to that quarter point less. But you have to figure out if you can break even over time from that extra cost,” he explains. “Most won’t be able to pay that back. Most will buy another home or refinance in 5-6 years, so usually that payback period won’t matter. Usually, we work out a no-cost loan for them to make it work and save them dollars.”
Will You Stay in your Home for 30 Years?
Some people actually tell him that they won’t be moving in 30 years and it will be worth it.
“Historically, that’s not going to happen. Not many people stay in their homes for 30 years anymore,” Harvey states.
He feels that adjustable rate mortgages can be a good and safe option for some people.
“ARMs are a dirty word to so many people. But if you know you will be selling your home or buying another home in 5-7 years, why pay more interest than you have to?” he says. “And ARMs are in the upper 2 percent range.”
Does a 0.25% Difference Matter?
From mortgage lender to mortgage lender, the difference in opinion can be quite opposite about the low interest rates. For instance, Chuck Hoscheidt feels that a quarter of a percentage point can make a big difference in someone’s payments and life. He is senior vice president of retail lending at MSI Mortgage Services in Bloomington, Ill.
“It’s a great time to buy a house if a person wants to buy a home. Rates are still low, and based upon what I read, rents continue to increase,” he says. “And there are lots of programs out there to help them buy a home.”
These programs can include down payment or closing assistance, and some programs can help certain professionals such as teachers and police officers with buying a home. Ask your lender or research your county, municipality or go to Downpaymentresource.com to get started with looking for what’s out there.
But when it comes to interest rates, he points out that a quarter of a percentage might not seem like a lot month to month, but it adds up year after year.
For instance, here’s what the interest and principal payments would be with certain interest rates on a $200,000 loan for 30 years with 20 percent down:
4.25 percent APR — $984 monthly payments with a total of $154,197 in interest paid over three decades.
4.00 percent APR — $955 monthly payments with a total of $143,800 in interest paid over three decades.
3.75 percent APR — $926 monthly payments with a total of $133,443 in interest paid over three decades.
OK. Doesn’t seem like a big difference. But that extra $25 a month you don’t have to pay each month with a 3.75 interest rate is an extra $300 a year. Everyone likes an extra $300 in their pocket.
Haven’t Refi’d in 12 Months? Research it.
Hoscheidt emphasizes, too, that anyone who hasn’t refinanced in the last 12 months needs to research it.
“Based on statistics, there are a lot of people out there that still haven’t refinanced. It’s hard to understand that since we have gone through a long period of interest rates that are low,” he says.
But now that the rates are below the 4 percent rate again, it’s worth the research to see if it helps lower someone’s payments.
“For some, maybe their home didn’t appraise for what they thought it should, and they weren’t able to refinance based on loan to value,” he explains. “Maybe they got disgruntled with the process. But what we have seen in the market in many areas is that homes might have a different value now.”