Lower interest rates helpful to some
Once upon a time, interest rates were the holy grail of the real estate market. If the rates went up, fewer people could qualify for financing and sales would go down. If the rates went down, potential buyers were given more buying power and sales would go up. Well that was in the good old days, today even the Federal Reserve lowering the prime rate to a target range of zero to 0.25 percent doesn’t bring a smile to the face of most people, except maybe mortgage brokers.
In the middle of December the Federal Reserve made even more history than we have been recently experiencing by lowering the prime rate three-quarters of a percent. Prior to the Feds’ move, mortgage rates already started falling after the government launched a sweeping effort in late November to help the United States housing market by buying up to $600 billion of mortgage-related securities and other debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
This resulted in some select 30-year fixed mortgage rates dropping as low as 5.06 percent with some mortgage brokers quoting interest rates close to 4.5 percent for buyers with strong credit and hefty down payments. In addition, 15-year, fixed-rate mortgages dropped to 4.92 percent.
Although mortgage rates for the average borrower did decline to a 37 year low, averaging 5.19 percent for a 30-year fixed rate loan after the Federal Reserve cut the prime rate, the real beneficiaries of the lower prime rate will be homeowners with adjustable rate mortgages and lines of credit.
Many home equity lines of credit and home equity loans as well as credit cards with variable interest rates are tied to prime rates, therefore, people with these types of loans will benefit from the lower prime. All of this is great news for anyone looking to lock into a 30-year fixed rate mortgage, however, not everyone will be able to take advantage since the interest terms of many home equity loans are already at their minimums, prohibiting a further decline in rates.
It’s predicted that the new lower rates will bring an enormous number of people interested in either refinancing their higher rate 30- or 15-year, fixed-rate mortgages or converting adjustable rate mortgages into fixed rate. Nevertheless, for homeowners who are getting close to losing their homes, lower rates won’t help since only people with exceptional credit scores are being considered, and being in pre-foreclosure will automatically eliminate these homeowners from qualifying. Lower rates on adjustable rate mortgages could, however, help many homeowners who are not yet in the foreclosure process, but are struggling to meet their monthly payments by reducing their monthly mortgage payments.
How much relief will these historically lower rates have on the housing market? Most economists unfortunately don’t expect it to help significantly. Lower rates may encourage some potential buyers to come out from under their rocks, but with the economy as a whole being fluid, even people with the money and ability to qualify for financing are sitting on their hands.
The good news is that we’re entering a new year, and hopefully, the worst is behind us. Maybe we’ll all come out the other side with a different perspective on homeownership, and end the fairy tale with, "They all lived happily ever after." Happy New Year!