Buying or selling a home is a big decision, even during the best of times. Nowadays, in the midst of the coronavirus pandemic, both homeowners and homebuyers are faced with greater economic uncertainty than we’ve seen in recent history. Who could blame anyone for being too anxious to make a move? Stepping into the big unknown is scary. But education is the antidote to anxiety. So if you’re thinking of buying or selling, understanding the true nature of today’s real estate market is a must.
The coronavirus has had a wide-ranging impact on a host of industries and US financial markets. Some of the effects of the pandemic are easy to see: nearly all of us know someone who has lost a job. We can observe the volatility of the stock market when we check in on our retirement and other investment accounts. But some influences are a little less obvious. The pandemic’s influence on credit markets is one of those.
Mortgage Rates Are Historically Low
It’s perhaps the sole silver lining of the coronavirus crisis: interest rates on several types of loan—including mortgages—have dipped significantly. That’s due to two independent changes. The first has affected variable-rate mortgages. The Federal Reserve has, for the time being, lowered the rate they charge banks and other financial institutions for borrowing money in the short term to near 0%. Banks can pass their savings on to homebuyers and still make a profit.
The second change is a little more complicated. Wary investors have moved their money out of the volatile stock market and into the safer haven of the bond market—specifically 10-year Treasury notes. It comes down to supply and demand: as more investors purchase these notes, their price has risen and their yield has decreased. Back in 2010, 10-year T-bills yielded an average of 3.73%. Today that average is 0.66%. That means that lending institutions can make more money writing low-interest mortgages than they can by purchasing ten-year T-bills.
How Do Lower Interest Rates Affect Me?
Some of us are old enough to remember the early 1980’s when the average rate on a 30-year fixed mortgage reached over 18%. But even as recently as 2017, the average rate was over 4%. In September of this year, the average rate was around 3%, which means that many mortgages have been written for less than that. These historically low-interest rates are generally offered to the most creditworthy homebuyers, but let’s take a look at the average savings borrowers can expect to see. On a 30-year loan, a 1% drop in interest rate yields savings of $55 per month per $100,000 borrowed. At today’s interest rates, the monthly payment on a $200,000 loan would be $111.62 less today than it would have been in 2017. That’s good news for both homebuyers and sellers. And that’s one reason why the St. Louis real estate market and home sales at Worth Clark Realty are booming. Between March 2020—the month when the global pandemic became top of mind for US residents—and June 2020, St. Louis saw a 20% increase in home sales. On top of that, Worth Clark Realty is continuing to set monthly all-time records for closed transactions.
Mortgages are as diverse as the people who buy homes. A wide range of independent factors come into play to determine how much you’ll pay for a mortgage, both on a monthly basis and across the lifetime of your loan. Many homebuyers compare a dozen or more mortgages before making a decision and that’s a very wise thing to do.
Knowing how large a mortgage payment you can afford is, of course, critical. That’s one reason why home buyers often choose to get “prequalified” for a loan before they even begin searching for a home. It gives them realistic purchase price parameters. Keep in mind that pre-qualification isn’t the same as pre-approval. Your lender isn’t committing to lending you money. But pre-qualification gives you a great starting point and a clearer picture of how buying a home will influence your finances.
Two of the most important considerations to take into account are how large a down payment you’ll put down on your home and how long you intend to live in your home. Putting down at least 20% of the purchase price of your home will save you some money. If you put down less, you will be required to pay private mortgage insurance (PMI) for the entire period that you don’t have 20% equity in your home. PMI payments can be as high as 1% of your mortgage principal, or $1,000 annually on a $100,000 loan.
If you know you’re only going to live in your home for a short period of time, choosing a variable-rate mortgage can save you money. Interest rates on variable mortgages tend to be lower. But the initially lower interest rate you get is only locked in for a few years—usually three or five. As credit markets change—and we’ve already seen that they can do so drastically—you could see a significant jump in your monthly payment when the initial period of your loan ends. On the other hand, rates could go down, too. If you take out a variable-rate mortgage, you should be prepared for either eventuality.
Choosing a Lender
You have plenty of choices when seeking the best mortgage lender for your needs. Chances are, the bank where you keep your savings or checking account is one of them. If you have an established relationship with a bank, that’s not a bad place to start your search for a mortgage simply because your bank wants as much of your business as they can get. They may offer you more favorable terms than other lending institutions to earn it. Credit unions often offer more favorable rates than commercial banks to their members. You might consider joining one before you start shopping for a mortgage. Online banks, with their lower overhead costs, can sometimes offer lower rates than brick-and-mortar banks, too.
Simplifying the Mortgage Process
Working with various lenders on your own to find the best deal can be time-consuming. Each one will require you to submit financial documents before providing an estimate on your loan costs. To simplify your search, you might choose to work with a mortgage broker instead.
Mortgage brokers may maintain relationships with dozens of lenders and they have easy access to a range of available rates. You can submit your information once and let your mortgage broker do the shopping for you. Mortgage brokers can be particularly helpful for homebuyers who have a short or spotty credit history because they often work with lenders whose borrower qualification standards are less restrictive. Incidentally, if you haven’t downloaded a free copy of your credit report, you should take that step. To prequalify for a loan, you’ll be asked to provide an estimate of your credit score. And if your credit score is on the low side, there are a few easy ways to improve it and position yourself for a lower-interest offer.
St. Louis Summed Up
From art museums to the Arch, from baseball to the blues, St. Louis is a vibrant city where the cost of living a fun-filled life is surprisingly low. Today’s low mortgage rates make the city even more affordable. St Louis’ fastest-growing real estate company, Worth Clark Realty can help educate you on the mortgage market and, what’s more, provide the insider’s view you need to find the perfect home.
Susan Doktor is a journalist and business strategist who hails from New York City. She writes on a wide range of subjects, including real estate, financial, and lifestyle topics. Follow her on Twitter @branddoktor.