Mortgage rates have fallen below a key threshold for the first time in nearly four years, an event that could have a significant impact on the housing market.
The average rate for a 30-year, fixed-rate home loan dipped to 5.98 percent, marking the first time since September 2022 that rates were below 6 percent, according to the Primary Mortgage Market Survey report published Thursday from mortgage buyer Freddie Mac.
While the rate is only slightly lower than last week’s average of 6.01 percent, the move into the 5 percent range is important, said Bhavesh Patel, a consumer channel executive at Chase Home Lending.
“Generally, when rates drop to year lows, we typically see demand increase for both purchase and refinance applications,” Patel said in an email to The Independent. “We tend to see more borrowers choosing to lock in their rate, either to improve affordability, increase purchase power, or lower monthly payments for existing loans.”
It’s possible that Thursday’s report could have a ripple effect across home buyers and sellers, experts told The Independent.
Buyer boost
With mortgage rates rising above 6 percent in late 2022 and even passing 7 percent multiple times, buyers have been stuck with high home loan rates compared to the historic lows seen during the pandemic.
So, does a move into the high 5-percent range provide the signal that hesitant buyers are looking for? Yes, said Jeremy Schachter, a branch manager at lender Fairway Independent Mortgage Corporation.
The timing of the news is important, too, he said. The coming months are peak season for home buying.
“We have been hovering in the [6’s and] low 7's since 2022, more or less,” Schachter said in an email to The Independent. “Dropping the rates to almost 2 [percentage points] will start buyer activity, especially in the busiest time frame, which is the spring to summer.”
That being said, current rates may not be low enough for some potential homebuyers, Patel said.
“Even as rates decline, some buyers and owners may be hesitant to take action until rates decline even further,” he said.
Holding out for rates to drop even a quarter of a percentage point can allow buyers to purchase a more expensive home and maintain roughly the same mortgage payment with today’s rate.
“It’s important to understand that even modest rate declines can make a big impact over the life of a loan,” Patel said. “For example, for every 0.25% reduction in rates, a prospective [buyer] can afford roughly 2.5% more of a home and have the same monthly payment.”
Seller spike
For the past few years, the mortgage market has seen the “lock-in” or “rate jail” effect, where homeowners who have mortgages from the historic lows of the pandemic don’t want to sell and buy a new home because rates are so much higher than what they currently have.
With home loan rates now in the 5-percent range, those rate handcuffs might come off, said Kim Zweiger, a home loan specialist at lender Churchill Mortgage.
“For current homeowners looking to upsize – or even downsize – their current home to better fit their needs and lifestyle, it would be easier to swallow the new monthly payment at a lower interest rate,” Zweiger said in an email to The Independent. “Sub-6 rates would potentially entice current homeowners in what is called ‘rate jail’ to break free from their existing interest rate.”
Sub-6 percent rates could also spur existing homeowners to refinance their current mortgages, a move that might make sense for those with rates in the 7-percent range, for example.
“We’ve seen the impact of the ‘lock-in effect’ over the last few years as many homeowners have chosen to stay put to hold onto lower rates,” Patel said. “As rates decline, even marginally, we could see a spike in refinances and more sellers deciding to get off the fence and into their next property.”
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