Will mortgage rates go back to 3% again?

They say never say never never. but why?

Because if I said that, everything I said would never happen, but it usually does.

Well, speaking of which, Fannie Mae’s chief economist Doug Duncan recently said that barring a “catastrophic economic event,” we don’t expect mortgage rates to return to 3% in our lifetime.

I He wrote about it On Twitter, it received a lot of interaction, with most of them saying he was right. Others ask how old he is.

My opinion was that when I hear things like “not in our lifetime”, I naturally expect it to happen sooner rather than later.

How did we get a 3% mortgage rate in the first place?

Before we talk about the possibility of mortgage rates reaching 3% again, let’s discuss how they got there in the first place.

After the subprime mortgage crisis of the early 2000s led to the Great Recession of 2007–09, the Federal Reserve took action to lower its lending rate (the federal funds rate) to near zero.

This was done to increase economic output by encouraging banks to lend money and encouraging consumers and businesses to take out loans.

Despite the Fed’s best efforts, the economy continued to contract, leading to an unconventional monetary policy called quantitative easing.

Without going into too much detail here, the Fed began buying long-term Treasury bonds and mortgage-backed securities to stimulate lending and turn the economy around.

Thanks to a very large new buyer in the market, bond prices rose, yields (or interest rates) fell, and consumer mortgage rates fell.

By the end of 2011, the 30-year fixed rate had fallen below 4%, according to Freddie Mac, as shown in Unique scheme In 2012, it was in the 3% range.

The Fed’s quantitative easing program was launched in 2008 and continued through 2020, with COVID-19 requiring an additional round.

Effectively, this was the perfect storm for zero interest rate policy (ZIRP) coupled with massive buying of mortgage-backed securities. They currently have over $2.5 trillion in MBS!

This resulted in the lowest rate on a 30-year fixed mortgage ever, and many lucky American homeowners were able to get one.

Could the same thing happen again?

Anything is possible, that’s why I say never say never. But as Duncan pointed out, it might take some disaster. Or perhaps a major geopolitical event. Or both.

Some have wrongly claimed that we need a pandemic to see mortgage rates at 3%, but if you study the timeline of mortgage rates, that’s simply not true.

As we mentioned earlier, the 30-year fixed rate was below 4% in 2011, nearly a decade before the coronavirus reared its ugly head.

Yes, the pandemic sent mortgage rates lower, with the 30-year fixed rate falling to a record low of 2.65% during the week ending January 7, 2021, according to Freddie Mac.

But all it took was a global financial crisis to get mortgage rates to 3%. It’s that easy (joke).

This does not mean that it is possible, but it is clearly possible. Of course, these may be generational events.

So “age” may be the wrong choice of word here, but “generation” may be the correct choice. As in, not in this generation. But maybe it’s next.

If the generation is around 30 years old, that means many people could see the same thing happening again, although perhaps not very soon.

However, things tend to move a lot faster these days, and some say we live in a low-interest-rate world now where a return to double-digit interest rates is unthinkable.

Even average long-term interest rates may be out of the question for some given the high housing prices these days.

If you look at the average rate of a 30-year fixed mortgage over the past 50 years, you will find that it is close to current levels of just over 7%.

If we exclude the extreme mortgage rates of the 1980s, the long-term average is closer to 5.5%. But that includes the years of crazy low interest rates over the past decade…

What about a 4% mortgage rate?

Although I agree with Duncan’s general sentiment that a return to a fixed rate of 3% for 30 years is unlikely, at least anytime soon, we may be getting fairly close.

It wouldn’t shock me to see a consistent 30 year start with the number “4”. As in 4.99%, or something like that.

Well, home builders are still offering special discounts on mortgage rates at this very moment.

And if you’re willing to pay discount points at closing, if/when rates moderate with low inflation, a 4.99% rate may be within reach.

Even without the points, prices could approach those levels if the economy slows quickly and the Fed starts cutting interest rates again.

Remember, bad economic news is a friend of mortgage rates, so if unemployment rises, and production/spending falls, interest rates can fall very quickly.

At this point, many expect the Fed to begin lowering interest rates as the inflation war winds down, which if the 10-year bond yield cooperates, could lead to a 30-year fixed rate closer to 6% by 2025.

And maybe even less if mortgage interest rate differentials return to normal. That alone could get some borrowers back into the high 5% range without paying much at closing.

Of course, this is all just speculation and no one knows for sure which direction mortgage rates may be headed.

What are your options if mortgage rates don’t go back to 3%?

Even if your 3% mortgage doesn’t come back, there are various options to reduce your mortgage interest expenses.

First, there’s always buy-down, which involves paying discount points upfront to get a lower rate for the entire term of the loan.

This is a form of prepaid interest where you pay more today, but potentially save a lot over the life of the loan. You just have to hold the loan long enough for it to make sense.

There is also an additional payment on your mortgage, which depending on how much you pay each month, could lower your mortgage. effective Mortgage rate to something closer to 4-5%, or even 3%.

The more you pay for the principal, the less interest you pay, making your mortgage much like a home loan with a low interest rate.

We’ve also seen the resurgence of assumable mortgages, which allow the homebuyer to obtain a seller’s loan as well.

Millions of current homeowners have mortgage rates between 2-3%, so it may be possible to buy their home and get their mortgage at a lower rate.

There’s a new service trying to make this process easier called Roam. There are other similar services as well.

Finally, if you’re buying a new home, look for special rate buyouts from a homebuilder lender that offers a below-market rate.

Or if you’re buying a used home, ask the seller for concessions, which can be used to lower your interest rate.

Remember, you’re not necessarily stuck with your rate forever. If rates drop, consider refinancing at a lower rate and term to take advantage of that.

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