In normal years, mortgage rates move in concert with mortgage-backed securities and 10-year Treasury note yields, the benchmarks for mortgage rates. However, the COVID-19 crisis has created incredible volatility for mortgage rates, and the market isn’t functioning like normal.
This is making it harder for potential homebuyers to obtain affordable rates on non-conforming loans because of major issues including:
- Millions of Americans in forbearance programs who are delaying payments, creating stress and increased liquidity risk for lenders
- Rising qualification thresholds, including the requirement of higher credit scores and more cash on hand
- Housing supply constraints, with homeowners unlisting homes to prevent sick people from attending open houses
- Some loan programs now have a discrepancy between where mortgage rates should be under normal circumstances and where they actually are under COVID-19
All of these issues have created a uniquely difficult environment for potential homebuyers, where the media has been flouting all-time low rates despite rates not actually being there in some programs.
Below we will dive into why rates are fluctuating, so you can better understand how to adjust your strategy to deal with COVID-19.
Why Rates Are Fluctuating So Much
There are three big reasons why mortgage rates are so topsy-turvy.
1. More than 4 million U.S. borrowers are in mortgage forbearance programs
These borrowers, mostly with government-backed loans, can declare financial hardship and may be able to delay mortgage payments for up to a year. Mortgages in forbearance now account for more than 8% of all active mortgages in the U.S., whereas they represented less than 1% of mortgages at the beginning of 2020.
This is causing stress on lenders who are not receiving payments because they don’t have the liquidity to pay bondholders that they owe. Lenders are padding their margins to account for this increase in forbearances until the actual impact of the COVID-19 period is known.
Lenders are also increasingly moving away from or raising rates on more risky loans like jumbo loans, high-balance conforming loans, and investment property loans. But since lenders don’t face the same liquidity risk with conforming loans, rates on conforming loans under $510,400 are still competitively priced.
2. Mortgage application volume is high across the U.S.
With so many borrowers trying to refinance mortgages, banks have struggled to keep up with demand. This means the buying process and getting a mortgage rate lock can take longer than usual.
It also means that the downstream investors who own the mortgages getting refinanced face increased risk of churn due to high refinance activity.
3. The COVID-19 crisis has generally made 2020 unpredictable.
Many people have lost jobs, a widely available vaccine may not be available until 2021, and some people are scared to make big life changes during the pandemic.
This lack of clarity has caused mortgage rates to trend lower on average, with jumps in certain places.
Should I Try to Get a Mortgage Now?
Now that we’ve established what’s happening with rate fluctuations, you also should take a quick step back to ask if this is the best time to get a mortgage.
There are a lot of questions you should ask yourself if you are thinking about getting a mortgage while the coronavirus crisis continues to create uncertainty in the U.S. For example, you should seriously consider:
- What sort of job security do you have?
- What kind of loan will you need, conforming or non-conforming?
- If you need to take unemployment insurance at some point, would you still be able to pay your mortgage?
- Do you have enough in savings if long-term economic prospects trend downward?
- How good is your credit score now and will it remain steady even during this crisis?
- How quickly can you close on a purchase given the current environment and fluctuations?
- Have you shopped around enough to find the lender offering the best terms?
These sorts of questions can help you think about obtaining a mortgage while COVID-19 causes uncertainty for so many people and businesses. And these are the types of topics you should explore with the help of a partner that knows the mortgage market.
All that said, if you do have a secure job, savings, and are willing to put up with more stringent documentation requirements, it is possible to get a historically low mortgage rate locked in right now.
Get Help Planning Your Mortgage Journey
Working with a mortgage broker can be especially advantageous in this challenging environment. With mortgage rates fluctuating so much, a broker can help you work through challenges because they can get options from multiple lenders and help you time your mortgage rate lock.
At The Mortgage Hub, we’ve been helping people for years with all aspects of homebuying. As a broker that works with many lenders to get you the best terms possible, our team has experience quickly moving through the mortgage process and helping you lock in a favorable mortgage rate at the perfect time.