Why are Mortgage Interest Rates so low?

 

Mortgage interest rates are currently at a 50 year low. The national average for a 30 year fixed mortgage rate is approximately 4.5%. To give you some perspective, over the past 25 years over 18 of those years the national average mortgage rate has been above 7%. Thus, historically anything below 7% has been considered a good rate, below 6% a great rate and below 5% an excellent rate. We’re in excellent times.

There are a number of influences right now that are impacting mortgage interest rates. The mortgages being originated now are high quality. The underwriting and review process for someone obtaining a new mortgage is very detailed and thorough. Many loans originated 2-5 years ago wouldn’t be approved in today’s lending environment. As a result, the default rate on mortgages being originated now is expected to be very, very low. The less risk to the mortgage investor, the lower the return or interest to be collected.

The economy is not doing well and inflation is low or could even be negative. In a bad economy or period of low to no inflation all interest rates are low. As the economy begins to improve and prices for all goods and services begin to increase, so will mortgage interest rates. The forecast varies but the general consensus is that there are still some bad times ahead or the improvement is going to be slow. All of which will help keep mortgage interest rates low.

The biggest factor in the current low mortgage rates is the implied backing of Uncle Sam. 90% of the mortgages being originated today are ultimately owned by Fannie Mae or Freddie Mac. When a loan is owned by either of these government sponsored enterprises (GSE), there is an implied message that the U.S. government will pay any losses associated with the loan. With this implied guarantee, investors have no risk and therefore are willing to take a smaller return. Through Fannie Mae and Freddie Mac, the U.S. government is subsidizing the housing market and homeowners who refinance through lower mortgage interest rates. The estimates for how much this is costing tax payers ranges from $148 billion to $950 billion.

The final factor that is impacting mortgage rates is a combination of a bad economy and an implied government guarantee. This combination factor is where else can investors that are required to get some return on their funds (life insurance, pension funds, etc) to put their investable assets? The choice that many fund managers have is to keep their investable assets in cash (no risk but no return) or buy mortgage backed securities with very low risk and get a small return.

If you currently have a mortgage and haven’t looked at refinancing in the past four months, you may wish to consider looking into it. If you are on the fence about purchasing a new home or investment property, the current low rates could be just the incentive you need to make the numbers work in your favor.



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Gary L. Solka, Mortgage Banker

Sente Mortgage

Gary.Solka@SenteMortgage.com

512-637-9900

www.SolkaTeam.com