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Buy or Refi? Low Mortgage Rates Boost Buying Power

If the recent rise in historically low mortgage rates is activating some FOMO for you, these tips might be what you need to help you decide if the time is right for you to pursue a new loan.

On Jan. 7, 2021, the national average rate for a 30-year fixed rate mortgage dropped to 2.65%. By March 11, it was up to 3.05%. How high is that? Will rates keep going up?

If you're thinking about buying a new home or refinancing one you already own, watching fluctuations in mortgage rates can feel like deciding whether it's better to get in on the action or let it ride; but one of the biggest purchases most people make shouldn't feel like a gamble.

To get some perspective and demystify what those rates really mean, we sat down with Kitty Rich (MLO# 823849) a senior business development manager in BECU's mortgage division.

Kitty Rich
Kitty Rich, Senior Business Development Manager in BECU's mortgage division

How low are rates, comparatively speaking?

The short answer is, historically low. The rate for a 30-year fixed-rate mortgage hasn't been this low for this long since Freddie Mac started tracking rates in 1971. And we're not talking about just a few points of fluctuation during that 50-year period. For comparison, on Oct. 9, 1981, rates reached 18.63%.

But Rich points out that most people only think about rates when they are buying or refinancing, so they don't realize how much the rates can actually change.

"What was normal in the 1980s seems really high now," Rich said. "When rates dropped below 5% after the market crash in 2008, they were the lowest ever. People didn't think they could go lower."

Even though rates have crept up a bit, and they are expected to continue increasing, Rich expects they will increase slowly over the course of the next year, so there's no need to rush into a loan if it's too much of a stretch for you right now.

Why are low rates such a big deal?

Interest rates are a big factor in how much you're going to pay for a house each month — and over the life of your loan.

“Lower rates mean you have more buying power,” Rich said. “You can purchase a higher priced home.”

Using the median Seattle home price of $745,500 as an example, if you get a 30-year fixed-rate mortgage and make a down payment of 20% ($149,100) you'll need to finance $596,400. At 3.5%, your monthly payment for just principle and interest would be $2,678. If the interest rate goes up to 4.5%, those monthly payments go up to $3,022.

What other factors should I consider?

Rich cautioned against basing your decision to buy a home solely on interest rates. For one thing, that buying power she mentioned goes down the less money you can pay up front.

If the down payment is holding you back, it might be a good time to explore resources. Some banks and credit unions have special grant programs that can help.

Rich also advises paying attention to what the housing market is doing. Rising costs can have a big effect on what you can afford, so if you're in a position to buy, it might make more sense to go for it.

"Say you wait six months to save and the rate drops half a percent — if you're lucky," Rich said. "During that six-month time span, the home price could have gone up $30,000, which could price you out of the home."

Keep in mind that in addition to principle and interest, you'll also need to make sure you can afford taxes and insurance, and, in some cases, homeowners' association dues.

"Some condos require another $500 a month," Rich said. "You have to pay that on top of your loan payment. If you can afford $2,000 a month for housing costs, and your loan payment is $2,000 a month, the HOA dues will push you over your limit."

Inventory is also really tight in markets like Seattle, so you might find that there just aren't any homes available in your price range in the neighborhoods where you're shopping. Rich recommends expanding your search if you can drive farther or you are able to work remotely. It's better to expand your search than overextend yourself financially.

When you're shopping for a loan, be aware that different banks and credit unions charge different fees. Be sure to ask about origination, processing and underwriting fees.

Ultimately, how much you can afford to pay is more important than how much you qualify for.

"There's an old saying," Rich said. "You want to own the home. You don't want the home to own you."

How do I know how much I can afford?

Lenders use a formula called a debt-to-income ratio. It's basically a way to compare how much money you have coming in with how much you have going out.

Rich said a good guidepost is if you spend no more than 45% of your income on housing payments and all your bills combined. The lower that percentage, the better.

What if I own my home? Should I refinance?

Refinancing to a lower rate can be a great way to lower payments and take advantage of the equity in your home, but refinancing isn't always the best choice for everyone. There are costs associated with refinancing, so if you're not planning to keep the property for very long, the refi might not pay off.

Also, if you're already 10 years into a 30-year mortgage, less of your payments are going to interest, and more of your payments are going toward principle. You may not want to restart the clock and pay that interest all over again.

Rich suggested considering a shorter-term loan, like a 12-year, no-fee refi. Combined with the lower rates, your payments might be the same or lower, and you can pay the loan off faster.

Should I consider an adjustable rate mortgage?

With rates as low as they are, Rich doesn't recommend an adjustable rate mortgage (ARM) in most cases.

I'm ready to apply for a new loan. What can I expect?

You aren't the only one ready to cash in on low rates, especially for refinancing a home. Applying for a new loan right now can be a bit of a hurry-up-and-wait scenario.

"Turn times for most companies have been 60 to 90 days. Some have been longer," Rich said.

Do I need to worry about an application affecting my credit?

Mortgage inquiries are unlikely to have a significant effect on your credit score.

"You can do several mortgage inquiries and it's generally counted as one credit pull," Rich said.

What's the most important thing to think about when you're choosing a lender?

Besides doing your homework and making sure you know what you want, what you can afford and what the true costs are, Rich thinks trust between you and your lender is essential.

"Every situation is different, every member is different, every story is different," she said. "The loan officer is helping you with one of the biggest loans you have. You need to be able to trust that person."

This is not an offer for extension of credit or a commitment to lend. Mortgage loans are subject to membership, credit approval, and other underwriting criteria; not every applicant will qualify. Certain restrictions apply. Home loan programs, terms, and conditions are subject to change without notice.

Today's Purchase Rates—30 Year Fixed Conforming

  • Loan amount $240,000.00
  • Down payment 20%
  • Interest rate 3.250%
  • Discount points -0.375
  • APR 3.260%
  • Estimated payment* $1,044.50
  • Credit score 740+
  • Estimated closing costs $2,674.77

*Estimated monthly payments are based on an Example Loan Amount with no subordinate financing, an applicant Credit Score, the Interest Rate, and Discount Points disclosed above applicable to the product, and does not include amounts for taxes and insurance. Actual payment amount will be greater if an escrow account for taxes and insurance is established. Rate may be higher than advertised rate depending on loan terms and credit qualifications. Property insurance is required, and flood insurance may be required. Example loan amount is with a 20% down payment. Stated APR assumes posted points and owner occupancy. FHA and VA loans require additional funding fees and/or mortgage insurance, reflected in the monthly payment and/or APR when applicable. Additional underwriting may apply for FHA and VA. Mortgage Insurance (PMI) is required on non-VA loans with an LTV greater than 80% or a down payment less than 20% — such cost is not reflected in the payment above. Sample loans available to qualified borrowers only; speak with a BECU Mortgage Advisor for complete details. Property and flood insurance may be required.