In March, the Federal Reserve took steps to keep money flowing through the mortgage financing system, including two rate cuts that were part of the central bank’s efforts to protect the economy from sustaining even more damage from the COVID-19 pandemic.
Rates on fixed-rate mortgages and home equity lines have fallen since the Fed pledged to invest in billions of dollars’ worth of mortgage-backed securities (MBS) and cut short-term rates. However, fewer homes are being put on the markets, and applications are down, heralding a decline in home sales.
Here’s what all of this means for homebuyers, homeowners looking to refinance, individuals with adjustable-rate mortgages, and anyone curious about whether or not they should lock a rate.
Why the Federal Reserve Cut Interest Rates
Twelve days after a reduction of half a percentage point, the Fed announced another rate cut of a full percentage point — establishing a target federal funds rate to a range of 0% – 0.25%. These reductions were designed to help stimulate the economy when the worst of the pandemic is over and people get back to work, receiving full paychecks again.
The Fed announced that it would buy up as many MBS needed “to support smooth market functioning.” This strategy, known as quantitative easing, makes sure lenders have money available for buyers and refinancers to borrow. From mid-March to mid-April, fixed mortgage rates fell less than half a percentage point.
Lenders are undergoing heavy workloads as plenty of homeowners are currently looking to refinance. If you include yourself in that demographic, heed these tips:
Know why you’re financing: This will help you get the right loan. You may be looking to get a lower monthly payment, shorten the term, replace your adjustable-rate mortgage with a fixed-rate loan, to borrow more than you owe in a cash-out, or get rid of a Federal Housing Administration (FHA) loan.
Shop lenders: Each lender will hand over a disclosure document called a Loan Estimate. Compare these with any other offers to land the best possible deal. While shopping for a mortgage and/or a refinance, potential mortgagees should also refrain from giving their social security numbers until they’ve made a lender choice.
Ask your loan officer for advice about locking your rate. Usually, you can lock in a rate upon application. But considering the market is in turmoil, some lenders won’t let you lock in until the underwriting process.
Refinancing in the Age of COVID-19
Those looking to refinance fall into two distinct groups. The first includes those that may be further in their career, have owned their home for some time, and are looking to refinance to provide a higher degree of financial security. The other includes those that could be primarily first-time homebuyers, eager to take advantage of lower interest rates and make their first step on the right foot.
Do you have bad credit? Are you looking to refinance? By partnering with a credit repair company to improve your credit, you can take advantage of current lower interest rates. To learn more about our credit counseling services in Philadelphia, contact us today!