Mortgage rates have plummeted over the course of the last week — just in time to turn around a slump in mortgage borrowing.
Rates are once again very close to their all-time lows from early this year, because COVID-19's raging Delta variant has investors worried about the economic recovery, and because an unpopular fee on refinance loans just got tossed out by regulators.
Mortgage demand had been in decline before the latest developments. But homeowners and homebuyers who were holding back have now been rewarded with cheaper mortgage rates that can save them a great deal of money.
Mortgage applications fell while rates were still rising
During the week ending July 16, applications for mortgages fell by 4%, the Mortgage Bankers Association reported on Wednesday.
Rising mortgage rates earlier in the month may have contributed to the decline, though another factor might have been that Americans are enjoying their first summer without COVID-19 restrictions since 2019. Hotel occupancy rates are up, national parks are setting attendance records — and borrowing may have taken a backseat.
Applications for "purchase" mortgages sought by homebuyers declined 6% week-over-week and were down by 18% from a year ago. Refinance requests decreased by 3% compared to the week before and were also 18% lower than the same period last year.
“Refinance activity fell over the week, but because rates have stayed relatively low, the pace of applications was close to its highest level since early May," says MBA forecaster Joel Kan.
The significant year-over-year drop in refinances may seem unsurprising. After all, mortgage rates have been rock-bottom for a long time, and many homeowners have taken advantage. But a recent Zillow survey found 78% of eligible homeowners never refinanced over the past year.
Among those who did, 47% saved at least $300 a month.
A new reason for homeowners to refinance
Refi activity is expected to show a jolt in the MBA's next report — because the process just got cheaper for millions of Americans.
On July 16, the Federal Housing Finance Agency — which oversees mortgage giants Fannie Mae and Freddie Mac — announced it would be scrapping a refinance fee it introduced last year to help the two government-sponsored enterprises weather the pandemic. The FHFA said its "adverse market fee" would be gone as of Aug. 1.
Fannie and Freddie buy most U.S. home loans from lenders and bundle them into investments. Since last fall, refinance loans likely to be acquired by either of the companies cost an additional 0.5%.
“Eliminating the adverse market refinance fee will help families take advantage of the low-rate environment to save more money," FHFA acting director Sandra L. Thompson said in a news release.
Lenders had been passing the fee along to consumers largely through higher mortgage rates, according to housing market observers. The FHFA's announcement sent rates plummeting.
The average rate on a 30-year fixed-rate mortgage sank this week in Freddie Mac's weekly survey from 2.88% to just 2.78% — only an eighth of a point above January's record low of 2.65%. On 15-year loans, which are a popular choice for refinances, the average slid from 2.22% to 2.12% this week.
How to land the lowest mortgage rate possible
Yes, mortgage rates are still historically low — and falling. But getting the most attractive rate from a lender often requires a little bit of work, whether you’re applying for a refinance or purchase mortgage.
Your history as a borrower will heavily influence the rate you’re offered, so get a free look at your credit score and see if it's impressive enough. Spending time to improve your score is time well spent, if it results in a cheaper mortgage rate.
Then, shop around to find the lowest mortgage rate available in your area and for a person with your credit profile. Studies from Freddie Mac and others have found that comparing at least five mortgage offers is the key to saving thousands of dollars on your mortgage.
If a refi isn’t something you’re interested in, there are other ways of reducing the cost of homeownership. When it's time to buy or renew homeowners insurance, review quotes from multiple insurers to make sure you're not paying more than you should.
And, when you apply for a mortgage, understand that lenders will need to see you're able to make your monthly payments. They won't have much confidence if you're carrying multiple high-interest debts, like credit card balances.
Rolling those into a single, lower-interest debt consolidation loan will cut the overall cost of your debt, help you pay it off sooner — and persuade lenders you’ll make it as a homeowner.