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Homebuyers to get springtime boost from lower-than-expected mortgage rates

USA TODAY logo USA TODAY 3/22/2019 Janna Herron
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Less than six months ago, mortgage rates marched above 5 percent – the first time in seven years – and for weeks showed no signs of abating.

It was a tipping point for house hunters. Beaten down by rising prices, meager housing choices and bidding wars, they saw rates as one more obstacle and called it quits, causing sales to plummet, even in the hottest of U.S. markets.

“It was somewhat of a surprise to see the degree and intensity of the pullback,” said Robert Dietz, chief economist of the National Association of Home Builders. “Five percent at those pricing levels was enough to take the wind out of sails of the housing market.”

Enter Federal Reserve Chairman Jerome Powell, who in December promised patience on further interest rate hikes and, on Wednesday, predicted that rates wouldn’t budge for the rest of the year.

Mortgage rates are at 4.5 percent and aren't forecast to rise much for this year.

Here’s what it means for this year’s homebuying market.

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More buying power

Buyers won’t have to race against the clock like in 2018 when rates started at 4.25 percent in January and were a half-point higher by April, said Mike Fratantoni, chief economist of the Mortgage Bankers Association.

“By the time they found a house, prices and rates had priced them out,” he says. “That’s very frustrating for buyers.”

Lower rates – coupled with rising wages – helps affordability, too. The monthly payment for a $200,000, 30-year fixed mortgage is $71 dollars cheaper at 4.5 percent versus 5 percent. That doesn’t sound like much but can make the difference for a buyer on the margins. Total interest savings over the life of the loan is more impressive at $21,699.

“While folks might not have hit the bottom of the rate cycle – no one can perfectly time markets – on the historic side, these are still very attractive rates,” said John Pataky, executive vice president, chief consumer and banking executive at TIAA Bank.

Take the gains and run

On the seller's side, there’s finally some evidence that more move-up buyers are getting into the market, eventually freeing up inventory of desperately needed lower-priced homes. The average mortgage balance for purchases has reached record levels because of more move-up buyers, according to Fratantoni.

“It’s a musical chairs game,” he said. “You need someone in the higher end to move, and it works its way down the ladder, eventually opening up an entry-level home.”

Inventory in general has also been inching up, largely on the higher end, which has also seen the greatest slowdown in prices. Perhaps the trifecta of more supply, softening prices and lower rates is enough to persuade some once-stubborn owners to trade up, adding more affordable homes on the market.

In Denver, there’s anecdotal evidence that single-family landlords are putting their homes on the market to realize the gangbusters appreciation from the last several years – which slowed significantly in the fourth quarter – and reinvest those gains in a smaller, multifamily unit, says Nicole Reuth, branch manager at Fairway Independent Mortgage Corp. in Denver.

“We’re seeing renters coming in, saying their landlords are selling the house and they want to buy,” says Reuth, a real estate investor herself with 22 properties. “These are houses under $500,000. Sellers know they have something in very high demand.”

Unexpected fuel?

Mark Fleming, chief economist at First American, has a contrarian view. First, rates aren’t low enough to shake off the rate-trap effect, when homeowners decide against selling their home because they have a mortgage rate lower than the current levels.

“You would need rates to go down into the high threes to undo the effects for a lot of existing homeowners,” he said.

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Some inventory is coming onto the market, but not enough, he says, to satisfy demand. He still expects a wave of first-time homebuyers to come back into the market – especially given that rates have moderated from those scary, 5-percent levels.

“A lot of the softening may be off the table now. Yet again, we’re setting ourselves up again for a pretty solid seller’s market,” he said. “I wouldn’t be surprised if appreciation starts to pick up again.”

Buyers: What you can control

As a buyer, you can’t control the Fed or any of the other factors that could affect long-term interest rates. But there are a handful of things you can control that determine the interest rate you get on your mortgage.

Down payment: The more money you put down, the smaller your rate – with all other factors equal. That’s because you’re taking on more risk as a buyer and lessening the risk for your lender. On a monthly basis, you can eliminate private mortgage insurance portion if you can get a 20 percent down payment.

Credit rating: Lenders give the most favorable rates to people with higher credit scores who demonstrate a positive track record of repaying debts. On a $216,000, 30-year, fixed-rate mortgage, you’ll get a sub-4 mortgage rate if you have the highest tier of credit scores – 760-850 – versus a 4.5-percent rate if your score is 660 to 679, according to FICO.

Debt-to-income: Lenders also look at the percentage of your debt payments to your total monthly income. The higher the percentage, the riskier the loan. If you can, pay off the debt with the highest monthly payment to lower your DTI.

This article originally appeared on USA TODAY: Homebuyers to get springtime boost from lower-than-expected mortgage rates

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