Mortgage Rates

2020 Mortgage Rates Explained!

Here is an update about the Mortgage Industry and how it works, and predictions where we could see it at year-end!

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John Brown, A Realtor in the Park City, Utah area interviews Greg Cutt, a Mortgage banker ( with Guaranteed Rate about the Mortgage Industry.

Question 1:
I hear a lot about the Fed Cutting Interest rates to zero! Can I get a Mortgage rate that low? How does the Fed Rate affect mortgage rates?

When the Fed cuts rates, they are cutting the Fed Funds rate, which is the rate the Fed charges banks to borrow money from the Fed. They recently cut the rate to between 0% and .25%. Banks are constantly borrowing money from the Fed on a short term basis, so when the Fed cuts the rates, banks are able to offer lower rates on things like car loans, credit cards and home equity loans. Unfortunately, this does not necessarily impact mortgage rates. Mortgage rates are based on economic factors, such as unemployment, inflation, gold prices, the strength of the dollar, oil prices, etc. The news loves to say mortgage rates are dropping when the Fed cuts their rate, but that is always true. It normally does help adjustable-rate mortgages a little, not fixed-rate loans.

Question 2:
Could you touch on the difference in rate limits and refinancing and how those are affected right now?

Normally, rates for a purchase and a refi are about the same. However, about a month ago, lenders got so flooded with refis, they could not handle the volume. The only way to slow down volume is to raise rates, which is what all lenders did. They raised them for both purchases and refis. However, rates on refis increased more than purchases. Rates for a refi are about .375% to ½% higher than a purchase and the closing costs are higher as well.

Question 2.5: With every going on, are lending guidelines changing? If so, does this affect people who are self-employed more than a W-2 salaried employee?

In the last couple of days, lending guidelines have tightened for almost all loan types, regardless of whether you are self-employed or a W-2 salaried employee. However, things could end up being much harder for self-employed borrowers, if their income drops significantly for several months. My concern is lenders will ask to see a Profit and Loss statement for 2020, and if there is a big drop in the income, they may not qualify for a loan. Lenders will realize the drop was caused by the coronavirus, but lenders may be concerned it could take a long time for a self-employed borrower’s income to get back to normal and not be willing to do a mortgage. The guideline changes impact conforming Fannie Mae and Freddie Mac loans slightly, but jumbo loans are affected more dramatically. Down payment amounts and credit score requirements have increased. Also, loans for rental properties and cash-out refis are no longer allowed by most jumbo lenders. Conforming loans still allow cash-out refis and rental properties. It is possible there will be more tightening if the economy stays shut down for a long time.

Question 3:
For someone that has been sitting on the sidelines for a recession, how does the buying power of a lower rate compete with getting a good deal if prices drop lower? Is there a magic number or a guideline that you have for that?

There is a way to calculate how an increase or decrease in rates affects a person’s borrowing power. A rough rule of thumb is a 1% decrease in the rate increases your borrowing power between 13% and 14%. For example, a person who qualifies for a $750,000 loan at a rate of 4.50%, can qualify for an $850,000 loan at a rate of 3.50%.

Question 4:
With your crystal ball. Where do you see this in 60 days and a possible year-end?

I believe rates will drop a little once things get back to normal and the markets stabilize. Others in the industry feel the same way. It is hard to predict when this will happen since we still don’t know when the coronavirus will no longer be an issue. Once people go back to work it will take several months for businesses to get up to speed and for the economy to start growing again. My guess is it could be 4 to 6 months until we see rates get better.


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