This is why you can’t get that historically low mortgage rate

Dhara Singh
Reporter

As homeowners rush to lock in record low mortgage rates by refinancing, a strange thing is happening: They’re getting higher rates.

While the rate on 30-year fixed mortgages hit a 50-year low of 3.29% in the first week in March and ticked up last week to 3.36%, according to Freddie Mac, lenders aren’t offering those bargains. 

The average rate for a 30-year-fixed mortgage is 3.65% for refinancing among lenders at LendingTree, while the average at NerdWallet, which surveys national lenders, was higher at 3.767%

Read more: Refinancing mortgages: The full breakdown

The reason? Too many applications and not enough liquidity in the secondary market that buys securities backed by mortgages, experts said.

“It’s classic supply and demand,” said Jeff Tucker, economist at real estate website Zillow.com. “Lenders were overwhelmed by the demand. They’re having trouble taking more applications.”

PARK RIDGE, IL - JUNE 13: Unusually low mortgage rates of late have been a boom to the housing market and some real estate companies. (Photo by Tim Boyle/Getty Images)

Even after the Federal Reserve slashed its federal funds rate to near zero on Sunday and committed to buying $700 billion of Treasuries and mortgage-backed-securities, this may not be enough to push down mortgage rates for all consumers. Lenders will still be capped at capacity. 

“Now’s the time to get multiple quotes. You may see a discrepancy between lenders more than ever,” said Jeremy Sopko, cofounder of Nations Lending Corp, in light of the Fed’s emergency announcement. “You could see a half-point difference from one lender due to over capacity.”

Too many applications

As coronavirus fears spread into the market, the yield on the 10-year Treasury note sank to a record low at 0.48% earlier this month. Mortgages rates, which track the yield, followed and homeowners pounced.

Recent data shows that the number of refinance applications were up 479.2% from a year earlier, according to the Mortgage Bankers Association. 

Read more: When to refinance a mortgage

“As a digital lender we do refinances and at this particular point we are seeing 80% to 85% of our applications relating to refinance,” said Shawn Low, head of operations at Better.com, a digital mortgage lender. “Whereas in the regular market we were doing 60% refinance and 40% purchase.” 

While Better.com has been able to keep up with the volume of applications, the lender is also offering higher rates than the near-lows quoted by Freddie Mac. For instance, refinancing into a $200,000, 30-year-fixed mortgage in Allentown, Pennsylvania, with excellent credit could result in a rate as high as 4%, according to Better.com’s calculator

Recent data from Freddie Mac shows the U.S. 30 year fixed mortgage at 3.72%.

‘Rates will go down’

A lack of liquidity — the ability for securities to be purchased and sold quickly — in the mortgage-backed securities market also pushed rates up, experts said. There were many more mortgage-backed securities than investors who wanted to buy them. 

Now that the Fed has committed to purchasing $200 billion in mortgage-backed-securities — injecting more liquidity in the market and making more cash available for banks to lend out — that could help bring interest rates down in the long run.

“The fact that there was so much MBS to be bought, that pushed the rate up,” Sopko said. “Now that the Fed is buying them, the rates will go down.”

Other reason for higher rates

Other individual factors also play into what mortgage rate you’re offered.

One of these is your loan-to-value ratio (LTV), or how much you borrow versus the appraised value of your home. When this ratio is 80% or lower — meaning you owe 80% or less of your home’s value — lenders may offer cheaper interest rates because you’re less likely to default.

“There are tons of reasons why your personal rates are going to be higher,” said Matt Hackett, operations manager of Equity Now, a direct mortgage lender. “If you are taking out a cash-out refinance with a 80% or higher LTV, then you can expect to pay higher than that Freddie Mac rate.”

Your credit score also affects how lenders consider your risk level. 

For instance, if you take out a $200,000 mortgage with a FICO credit score in the 620-639 range, you would get a 4.89% annual percentage rate — which measures the interest rate and other fees. That APR goes down to 4.344% If your score goes up to the 640-659 range. 

Chart above with an arbitrary $200,000 30-year fixed mortgage set and credit score range of 620-639 (Credit: myFICO.com)

Last, don’t open any line of credit while you are refinancing. That could raise your risk level in the lender’s eyes, Low said.

Should you refinance?

If you’re not ready to refinance yet, it still doesn’t hurt to fill out the paperwork in case rates decrease in a few months.

“We are telling people who are getting even 4.5% rates that just to get all the documents in a row and don’t lock in the rate,” Hackett said. “Let's just sit there and see what will happen in a month or two.”

But don’t try to time rates.

“If you feel like this can save you money, it’s worth locking the rates,” said Low. “We’ve had customers where rates came down to 3.2% and they were still going to wait. But to time the market is a bad idea.”

Dhara Singh is a reporter at Cashay and Yahoo Finance. Follow her on Twitter at @Dsinghx.

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