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Mortgage Rates Fall Dramatically — What This Means for Homebuyers

Karen Doyle
couple admiring their new house with mortgage rates dropping
  • The average 30-year fixed rate fell to 4.34 percent on March 21.
  • The rate fell from 4.40 percent, the biggest drop in more than a year.
  • The rate was over 5 percent in November.

The average interest rate for a 30-year fixed mortgage dropped to 4.34 percent from 4.40 percent on March 21, 2019. This represents a drop of 6 basis points from the previous day, the largest drop in over a year. Normally, this would be a good sign for homebuyers, but a weakening economy concerns some experts.

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Why the Rate Dropped

The Federal Reserve Board announced on March 20 that it will reduce the bonds it holds on its balance sheet, which were purchased during and after the financial crisis, ending the quantitative easing that was put in place to stimulate the economy after the 2008 recession. This announcement indicates that interest rates may fall further.

The Fed also said it would hold interest rates steady and indicated it would not raise rates again this year. This announcement, combined with weak economic data around French and German manufacturing, indicated that fears of a global slowdown are beginning to take hold.

The board added that it was decreasing its projection for gross domestic product growth for this year to 2.1 percent from 2.3 percent in December. The Fed confirmed that “the growth of economic activity has slowed,” yet it still described the labor market as “strong.”

Related:  Fed Keeps Interest Rates Unchanged — What This Means For You

What This Means for Homebuyers

Typically, a drop in interest rates means a rise in demand for new mortgages, which precipitates a rise in home prices. The opposite is also true. In November 2018, the average 30-year fixed rate crept up over 5 percent, and home sales declined in December and January.

For someone who is buying a $300,000 home, every 25-basis-point drop in the mortgage interest rate translates to a $50 decrease in the monthly mortgage payment, according to CNBC. Compared to November, rates are down about 75 basis points, representing $150 off in monthly payments. Over the 30-year mortgage term, a borrower would pay $54,000 less in interest at the current rate versus the November rate.

While lower mortgage interest rates are a positive sign for homebuyers, the slowing economy is concerning. A decline in consumer confidence could cancel out the benefit of lower rates.

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This article originally appeared on GOBankingRates.com: Mortgage Rates Fall Dramatically — What This Means for Homebuyers