How Low Will Mortgage Interest Rates Go?

The mortgage world is all atwitter about current mortgage interest rates. They're low. Really low. Like I never thought I'd be locking loans with a "2" in front of them ever again*. I was wrong. (For 15-year terms; settle down out there. Although 30-year terms aren't far behind.)

Why? One word: Coronavirus.

The financial world is freaked out. There are fears of a global financial slowdown. Companies are adjusting their earnings projections, and the news is not good. Apple can't manufacture enough new iPhones to meet demand because their factories in China have been shut down for a month. There are serious concerns about Apple's abilities to meet expectations.

You know those giant containerships we see steaming through Puget Sound? Cargo volumes at US ports are estimated to be down by 20% or more on a year-on-year basis compared to 2019. Adidas, Walmart, Microsoft, Proctor & Gamble… These are a fraction of the companies that have announced reduced earnings expectations in light of coronavirus.

We're starting to feel the financial effects of what is likely to become a pandemic. And the stock market is reacting accordingly. I'm not gonna hold onto my Adidas stock if they've just reported their sales in Asia dropped by 85% year-over-year. (Well, I would. Because my financial advisor, Stephen Sklar, would tell me it's actually a great buying opportunity and I'd probably buy more. But not everyone has Stephen to guide them.). In fact, the stock market has lost, then gained, then lost again, all in the last few days of trading.

So when the stock market is doing poorly, where do investors put their money? Some of them put their money into bonds. Bonds are low-risk compared to the stock market. And the bond market (mostly) drives mortgage interest rates and thus mortgage interest rates are really, really good right now.

Are we in for a global economic meltdown?
I don't think so. I explained it to one friend like this: Think about what happens here on the Olympic Peninsula in Washington when it snows. Grocery stores are super busy beforehand and may even run out of select items. Once the flakes start to fall, the town slows way down. Schools are closed. Businesses operate with half the staff. Your Amazon Prime packages are delivered a few days late. Your after-work and after-school activities get canceled.

Now imagine that happening all over our region, if not our country, all at the same time. And imagine it lasting for a few weeks to a few months.

It's possible that we're in for something very similar. Not the end of the world. It will be an interesting time, but we'll pull through and life will go back to normal. Stock markets will recover, mortgage interest rates will increase, manufacturing and shipping will return to pre-virus levels.

Will mortgage interest rates continue to decrease?
It's possible. Most financial pundits think mortgage interest rates will stay low through the end of the year. Does that mean they'll get significantly lower than they are now? That's anybody's guess.

I'm frequently asked by customers if they should refinance now or wait to see if rates get any lower. Refinance now.

We know interest rates are low now. And we know they will increase eventually. But we don't know when that will happen. When it does happen, interest rates will increase practically overnight. If you waited to refinance, you will have waited too long.

In addition, you never know what could happen. People lose their jobs. Credit card companies lose your check and report a late payment to the credit bureau, killing your credit score. Home values decline (wait, that never happens…). If you have the ability to refinance and it makes financial sense to do so, do it now.

Speaking of which… Who should refinance?

You may have heard that it doesn't make sense to refinance unless you can reduce your interest rate by 1%. That's a load of garbage. Mathematically, it depends on your interest rate and your loan amount (not to mention your goals). If you owe $600,000 on your loan and you reduce your interest rate by 0.5%, that's a huge monthly savings. Likewise, with a loan amount of $80,000, it doesn't matter if your interest rate is 5% or 3%, it's going to have little effect on your monthly payment.

Bottom line: If your interest rate is in the high 3%s or above, you should have a conversation with your favorite mortgage loan officer. Hopefully that's me or Dominic! If you have a low loan balance, it might not make sense, but we can run the numbers and guide you through that process.

Or it might make sense to reduce your term if you're interested in paying off your loan faster.

You might also consider taking some cash out to pay off credit card debt, invest in college, finance a car, or stockpile dehydrated foods in your underground bunker.

What about the Feds lowering interest rates?
Yeah, about that. Every time the Feds lower interest rates, we get lots of calls. The Feds lowering interest rates doesn't actually affect mortgage interest rates like you'd think. I've talked about it before.

When the Federal Open Market Committee "lowers interest rates," they are decreasing the federal funds rate, the interest rate at which a bank lends funds maintained at the Federal Reserve to another bank overnight.

The higher the federal funds rate, the more expensive it is to borrow money. The federal funds rate is considered the base rate that determines many other interest rates and indices in the US economy. For example, when the federal funds rate decreases, the prime rate decreases. And the prime rate determines interest rates on things like credit cards and home equity lines of credit.

But the prime rate is a short-term index. Mortgages are more sensitive to the bond market and yields on US Treasury notes. Mortgage interest rates may decrease in anticipation of the Feds decreasing rates. But they often increase following a Fed decrease.

And that's what happened yesterday (albeit for a slightly different reason). News of the Fed's lowering interest rates spurred a little good-news action Monday afternoon, the stock market rallied, bonds moved lower, and many lenders repriced for the worse at the end of the day. We didn't panic, though. We suspected the markets would open down again on Tuesday, and they did. A short-term interest rate cut is great. But it's not a vaccine.

What if things get really bad out there?
A friend of mine came over to play cribbage tonight. She works for a local event space that includes a bar and restaurant. The employees had a lengthy meeting this afternoon about coronavirus. Will they have to shut down? If she doesn't work, she doesn't get paid. If she skips one paycheck, not the end of the world. But if she skips multiple paychecks, how will she pay her bills?

I told her that I believe if it gets that bad, provisions will be made. Many Americans live paycheck to paycheck. If you can't pay your bills because you haven't been able to work for a month, you will be in good company. And if that many people are in the same boat, there will likely be some kind of assistance made available. You'll be allowed to collect unemployment benefits or your mortgage company will allow you to skip two payments and tack them onto the end of your loan or you'll be eligible for some kind of disaster assistance loan or grant. The entire economy is probably not going to collapse.

What am I doing?
Being reasonable. I'm not panicking. But I am taking this seriously.

• I've traded handshakes and hugs for elbow bumps. I'm not a hugger anyway, so elbow bumps are a great alternative for me.

• I'm washing my hands so much that they're about to start bleeding. Anybody know a good moisturizing hand soap?
• My office is as clean as a surgical suite. Either David or myself wipe down every surface religiously several times a day.
• I've laid in some basic supplies (while still leaving some for my friends and neighbors). I don't think we're going to be filtering water out of streams and roasting possums over campfires in our front yards. But supply chains could be affected. Deliveries could be delayed. If I go to the store in two weeks and find they're out of avocados, no big deal. But if I go to the store and they're out of dog food, we're going to have a mutiny on our hands. So I'm buying (read: NOT hording) a little extra of whatever's important to me, be it avocados or dog food. Or beer.

Beyond that, it's business as usual for me. I'm staying positive, taking reasonable precautions, holding place in my community, and encouraging all my friends and family do the same.

In happiness and health,

- Emily, Dominic, and David.

* Rate term refinance, $300,000 loan amount, $400,000 property value, 2.75% interest rate - 2.862% APR - 15-year fixed rate, $2036 principal & interest per month.