Market watchers expected mortgage rates to be climbing to 4 percent now. In a pause for borrowers, the anticipated rise in rates has not really started.
Instead, mortgage rates have fallen in each of the past five weeks, according to Bankrate’s national survey of lenders.
A reason? Lenders are teeming with profits from a record year in 2020, and they have decided to offer better deals to borrowers to compete for business.
“There is no doubt that this is good news for consumers,” said Guy Cecala, editor of the trade publication Inside Mortgage Finance. “This means we’ll likely have mortgage rates of 3% or less that persist a little longer than expected. “
For owners seeks to refinance, price competition means that the window of opportunity remains open. Rates remain low enough that refinancing makes sense to more borrowers. And for buyers competing in a rapidly appreciating housing market, even small rate cuts increases their purchasing power.
“Whenever there is fierce competition, it is a victory for consumers,” says Greg McBride, CFA, Chief Financial Analyst of Bankrate.
How lenders set mortgage rates
Calculating mortgage rates is complicated, but here’s a simple rule: The 30-year fixed rate mortgage closely tracks the yield of the 10-year Treasury. When this rate increases, the 30-year mortgage tends to do the same.
While the 10-year yield and the 30 year mortgage rate usually evolve in tandem, the relationship is not perfect. Last year, the spread widened to 3 percentage points, or 300 basis points, well above the normal range of around 200 basis points.
Now the spread has narrowed to 155 basis points. It’s the smallest gap in a decade, according to Bankrate data.
Mortgage rates are influenced by other factors, such as the demand for home loans and the ability of lenders to meet that demand. When mortgage lenders have too much business, they raise rates to slow demands. When business is light, they tend to cut rates to attract more customers.
This is what is happening now. Last year, falling rates and an unexpected housing boom drove demand up much faster than lenders were able to increase their staff.
After a wave of hiring, lenders now have enough people to handle a heavy workload. But the mortgage refinancing boom has abated.
“Although mortgage buying activity is strong, there is a lack of heavy refi activity,” Cecala said.
After the record $ 3.83 trillion in mortgages last year, volume is expected to fall 14% this year to $ 3.28 trillion, according to the Mortgage Bankers Association.
This leaves lenders with a conundrum. They prefer not to fire the people they just hired.
“Before they start dropping staff, they want to see what else they can do,” explains Cecala. “The most obvious thing is to offer a better deal than the guy down the street.”
Strong earnings give lenders some leeway
Lenders performed very well last year. The Mortgage Bankers Association said the industry generated an average profit of $ 5,535 per loan in the third quarter of 2020, up sharply from the $ 1,924 earned by lenders during the same period in 2019. However, at Fourth quarter 2020, average profit had declined to $ 3,738.
The profitability cycle follows a predictable pattern, says Gene Thompson, CEO of InterLinc Mortgage Services in Houston. Lenders cash in their profits during boom times like the one they experienced last summer, then return some if necessary.
“When that volume starts to decline, we’ll see companies start using some of their war chest to chase the volume,” Thompson said. “That’s when things will start to change on the profitability side for lenders.
This scenario is playing out now. Shares of publicly traded mortgage companies soared as industry profits rose. However, the actions of Rocket Cos. and UWM Mortgage recently took a hit as this new reality became clear.
Rocket – the parent company of Quicken Loans, the nation’s largest lender – reported a 3.74% margin in the first quarter of 2021, down from 4.41% in the fourth quarter of 2020. The company said that it expects further erosion in profitability in 2021, as margins fall below 3 percent.
The trend scared investors off, but Rocket CEO Jay Farner said there was a lot of wiggle room. “The margins, although returning to more historical averages, are incredibly strong,” he said on a call for results in early May.
What you can do to get the best mortgage rate
Before committing to a lender, do your research. To get the best mortgage rate, follow these steps:
- Compare the offers: This advice is especially relevant now that lenders are competing on price. “This is why it is so important to compare the prices“McBride says.” Not everyone offers the same price, and some lenders may be motivated to be very competitive on price. “Receive offers from at least three lenders. If you live in an area where competition among local banks is limited, you may need to buy online. The advantage: Comparative purchases can save you thousands of dollars over the life of the loan.
- Look beyond physical lenders: The bank or credit union where you keep your money may offer the best deal on a home loan, but be sure to shop for comparisons. The rates and closing costs can vary widely depending on the lender.
- Improve Your Credit Score: Improve your credit is the best way to lower your rate, and it’s more effective than increasing your down payment or improving your debt ratio. The best deals go to borrowers with a credit score of 740 or higher.