The average 30-year fixed mortgage interest rate fell to 4.06% at the end of March 2019, the lowest point in 15 months, according to Freddie Mac. This was 38 basis points lower than the average rate in March 2018 and 88 points lower than the 12-month high of 4.94% in November 2018.
Just a few months ago, it looked like rates would rise in 2019 and beyond. In its final decision for 2018, the Federal Reserve raised its benchmark interest rate from 2.25% to 2.50% and flagged the likelihood of 2 additional rate hikes in 2019. The Fed has since walked back its forecast and now expects the federal funds rate (which closely mirrors the benchmark rate) to hang around 2.4% for the remainder of 2019. Some people, most notably President Donald Trump, are even calling for the Fed to cut rates.
Lenders set their own rates, but they are heavily influenced by the federal funds rate. Members of the Federal Reserve’s Open Market Committee meet 8 times each year to vote on the benchmark federal funds rate. This more or less determines the rate at which banks and credit unions lend money to each other overnight to meet the Fed’s reserve requirements. When the federal funds rate goes up, banks pass the costs on to consumers through higher interest rates for mortgages, loans, and other forms of credit. When the federal funds rate goes down or when expectations for a rate increase dissipate, it takes pressure off mortgage lenders, who are then able to offer buyers better rates.
Buying Has Become Cheaper, even in Hot Property Market
Finding an affordable home is a big deal for most buyers, but how many buyers worry about getting an affordable interest rate?
As the following table shows, even the smallest movement in interest rates can make thousands of dollars’ worth of difference to the total amount of interest a buyer pays a lender over the duration of a mortgage loan.
Home prices rose 7.2% in 12 months and 1.4% in the 3 months to the end of February 2018, according to Zillow (which reports figures at a 1-month lag). Mortgage rates fell 8.6% in 12 months and 17.8% in 3 months during roughly the corresponding period, according to Freddie Mac. A person buying a house at the average national price in March 2019 would have paid $3,100 more than a person buying 4 months earlier, but would have reduced by $31,793 their future interest payment liabilities.
Average home value
Average 30-year fixed rate
Total interest payments
Sources: MortgageCalculator.org, Freddie Mac, Zillow (with home values given at one-month lag).Assumes 20% down payment.
Of course, house prices aren’t even across the board. In Hawaii, houses are worth $617,900 on average, while in West Virginia the average value is $97,300. In Idaho and Utah, prices rose 17.2% and 14% respectively in the 12 months to February 2018. In Alaska and Delaware, prices dropped 0.8% and 0.4% during that same period.
Likewise, lenders don’t all set the same rates and borrowers don’t all qualify for the same rates. The average interest rate is just an average. But it pays to buy when average rates are low, and borrowers can earn themselves even better rates by shopping around between lenders.
Millions of Homeowners Can Save By Refinancing
Prospective home buyers aren’t the only ones who can benefit from the lower rates. According to Black Knight’s latest Mortgage Monitor report, 4.9 million homeowners could reduce their interest rate by at least 0.75% with a refinance.
The number of “re-financeable borrowers” hit a 2-year high at the end of February 2019 after hitting a 10-year low just 4 months earlier, according to Black Knight. Refinance volumes dropped significantly in late 2018 as rates rose, the report noted. It said the turnaround in rates in early 2019 could be a game changer for the housing and refinance markets “if rates hold at this level for an extended period of time.”
Refinancing involves closing costs, so it only makes sense to refinance if the new interest rate is substantially better than the old one. As a general rule, the more time that has passed since the start of a mortgage, the greater the gap in interest rates must be for a refinance to make sense. In the early years of a mortgage, a 0.75% lower interest rate could be enough to deliver savings. But in the later years of a mortgage, the rate would need to be lower by 1% or even 2% for a refinance to make sense.
The Big Decision: Apply for a Mortgage Now or Later?
If the Fed maintains its position of no rate hikes in 2019 “unless conditions change significantly,” then mortgage rates are likely to stay low for the remainder of the year. With that said, in December the Fed flagged 2 rate hikes in 2019 and a month earlier it was flagging 3 rate hikes in 2019, so there are never any certainties regarding the direction of interest rates.
Nobody can say for sure what average mortgage rates will be in 6 months or a year, but they are certainly low right now. The following are a few ways that buyers can take advantage of the current low mortgage rates.
Lock in a rate. Searching for a house and searching for a mortgage at the same time can be a stressful experience. If you need a bit more time to find the right house, the good news is that some lenders let their customers lock in a pre-approved rate for up to 90 to 120 days. We used a mortgage calculator to compare 4% and 4.25% mortgage rates for a $225,000 purchase with 20% down payment. For a 30-year fixed mortgage, the lower rate would save you around $9,500 across the life of the loan.
Take an ARM. Adjustable-rate mortgages offer lower interest rates than fixed-rate mortgages for an introductory period of 3 to 10 years. As an example, a 5/1 ARM refers to a loan where the rate is locked in for 5 years and adjusted every subsequent year for the duration of the loan. If mortgage rates are the same or lower at the end of the introductory period, you’re in luck. If they’re higher at the end of the period, you can expect to start paying more interest. But if you’re confident of being able to pay off the loan early, an ARM may be worthwhile anyway.
- Shop around. Buyers are better off when average rates are lower, but some are better off than others. Lenders calculate your rate based on factors like your credit score, loan amount, and financial situation. Before agreeing to a mortgage, always shop around and compare lender rates. It mightn’t seem like a big deal if one lender offers a marginally better rate than another, but it can mean thousands of dollars of savings in the long run.