The Federal Reserve cut short-term interest rates by half a percentage point on Tuesday in an effort to protect the economy from more damage from the virus outbreak. The move may present options for mortgage shoppers.
What does all this mean for home buyers? Or those looking to lock in a mortgage rate? For owners considering a refinance? And for those holding an adjustable-rate mortgage?
WHY THE FED CUT INTEREST RATES
Mortgage rates started falling weeks before the Fed鈥檚 emergency rate cut. By reducing the federal funds rate, the Fed is playing catch-up, following the lead of the market forces that set mortgage rates.
The novel coronavirus identified in late 2019 has been of increasing concern to the world鈥檚 stock and bond markets. The distress stems from uncertainty about how the officially named COVID-19 outbreak will impact manufacturing, tourism, travel, the hospitality industry and even consumer spending.
鈥淟ower rates are likely to drive refinances higher and may entice home buyers out to shop as well. That鈥檚 certainly the Fed鈥檚 hope,鈥� says Danielle Hale, chief economist for Realtor.com. 鈥淗owever, if buyers are hesitant to go shopping because they want to avoid contact with others, this could dampen home sales.鈥�
THE IMPACT ON MORTGAGE RATES
The Federal Reserve manages the interest rates used by banks to borrow from each other. It鈥檚 a foundation for how longer-term interest rates move.
While mortgage rates are not directly affected by Fed rate decisions, they can鈥檛 resist the general direction of the bond market. Lenders use the 10-year Treasury as a guide to pricing loans, and the yields have reached record lows.
Mortgage rates are likely to follow, at least in the near-term. The 30-year loan is already approaching 鈥� and at times sinking below 鈥� the all-time low of 3.31% (with 0.70 discount points) reported by Freddie Mac on Nov. 21, 2012.
The news is also good for those with or shopping for adjustable-rate mortgages and home equity lines of credit, which are directly guided by Fed rate cuts. ARMs will likely see lower rates at their next reset period, and HELOCs could fall half a percentage point in the next billing cycle or two.
WHAT TO KNOW IF YOU鈥橰E:
BUYING A HOME
If you鈥檙e in the market to buy a home, you probably face competition from other buyers because there aren鈥檛 enough homes for sale to meet demand.
There鈥檚 only so much that lower mortgage rates can do to stimulate home sales. Mortgage rates and affordability aren鈥檛 the biggest challenges in today鈥檚 housing market, Hale says. 鈥淎 lack of options continues to be the largest hurdle,鈥� she says.
Here are tactics that make you more likely to prevail in a hot housing market:
鈥� Get a mortgage preapproval. A preapproval letter gives sellers confidence that you鈥檒l be able to get a loan and that the sale will go through.
鈥� Limit contingencies, such as requesting that the seller make repairs or pay your closing costs.
鈥� Let the seller know that you can be flexible about the closing date if that鈥檚 possible.
If the fear of COVID-19 makes you reluctant to tour homes but you鈥檙e committed to buying this year, 鈥渘ow is the time to strike,鈥� says Daryl Fairweather, chief economist for Redfin, an online real estate broker. 鈥淧eople who commit now are going to have an advantage over people who wait.鈥�
REFINANCING
Plenty of homeowners are refinancing now. Lenders are enduring heavy workloads. You can do your part to lighten the load by submitting a complete application, with all the necessary documentation. Online applications usually will let you know if you haven鈥檛 provided all the necessary documents.
Other tips:
鈥� Know why you鈥檙e refinancing so you can get the right loan. It might be to get a lower monthly payment, to shorten the loan term, replace your adjustable-rate mortgage with a low fixed-rate loan, to borrow more than you owe in a cash-out refinance, or to get rid of FHA mortgage insurance.
鈥� Shop more than one lender. You鈥檙e more likely to land the best possible deal if you apply with multiple lenders. Each lender will give you a disclosure document called a Loan Estimate. By comparing Loan Estimates, you鈥檒l be able to identify the best offer.
鈥� Lock your rate for long enough. During normal times, a 30- or 45-day rate lock for a refinance is sufficient to close the loan on time. But when so many homeowners are refinancing at once, it might behoove you to get a longer rate lock. Ask your loan officer for guidance.
Be careful of getting a cash-out refinance. 鈥淚t might be tempting to take cash out, but especially if you鈥檙e worried about a recession in the future, or your job security, it might not be the best idea,鈥� Fairweather says. You want to have a cushion, instead of taking out all your equity, she says.
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This article originally appeared on the personal finance
RELATED LINKS:
NerdWallet: Refinance calculator http://bit.ly/nerdwallet-mortgage-refinance-calculator
NerdWallet: Compare current mortgage rates http://bit.ly/nerdwallet-compare-mortgage-rates
NerdWallet: HELOC: Understanding home equity lines of credit http://bit.ly/nerdwallet-HELOC-101
NerdWallet: How to get a mortgage preapproval http://bit.ly/nerdwallet-mortgage-preapproval
Hal M. Bundrick, Cfp, And Holden Lewis Of Nerdwallet, The Associated Press
