Mortgage rates dropped to all-time lows in 2020 and will shape 2021
As mortgage rates plummeted to all-time lows in 2020 in the pandemic’s wake, the housing market caught absolute fire as buyers took advantage.
Source: Freddie Mac
Mortgage rates dropped to as low as 2.67 percent on 30-year, fixed-rate mortgages, according to Freddie Mac, which allows buyers to afford much more home for their money, as rates, of course, have such a large influence on monthly mortgage payments.
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This drop, along with many Americans, spending much more time at home with the pandemic, reevaluating their home preferences and needs, created intense demand and further compressed inventory, especially at lower price points (those below $1 million in the Denver market).
For example, active listing inventory of single-family homes dropped 64.5 percent in Denver in November from a year ago, according to Denver Metro Association of Realtors data. As we have chronicled, this has pushed area home prices to all-time highs (Denver median sale prices of single-family homes rose 18.2 percent year-over-year in November to $554,500).
Because mortgage rates played such a critical role in shaping the local real estate market in 2020 and will continue to do so in 2021, I decided to do a post analyzing where mortgages are and where they’re heading.
Mortgages in 2021
To help provide the best analysis possible, I reached out to one of my favorite Denver lenders, Dan Dexter with Prosperity Home Mortgage, to help provide insight on the mortgage market.
Based on his 27 years in the business, Dan expects that mortgage rates will remain low for roughly the next 24 months as the U.S. Federal Reserve, whose actions influence mortgage rates, will work to keep them down to bolster housing as a key industry as the country faces pandemic-related economic challenges.
Mortgage rate projections from major mortgage industry players support this take. Through the third quarter 2021, Freddie Mac, Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors project mortgage rates will remain in the 3.0 percent range.
In addition the Federal Reserve has indicated that it doesn’t plan to raise rates in the foreseeable future and the Mortgage Bankers Association feels that rates will remain low for the foreseeable future, Dan says.
However, the economy has a role to play here. If the economy takes off in 2021, then rates could rise faster than expected. The pending second Covid-19 stimulus package may play a role, too, depending on if it is passed and how it performs.
Heading into 2021, below are five things to know about mortgages.
It’s not hard to get a mortgage
Despite some tightening of lending guidelines, it’s actually not hard to get a mortgage now, particularly if your finances are relatively straightforward.
However, if you’re self-employed things are a little more stringent. Lenders are looking closely at the income of self-employed borrowers to assess credit-worthiness. Income should be consistent and stable and borrowers will need to show current receipts, even within 30 days of closing the loan.
Also, restrictions on jumbo loans, loans for more than $586,850 in the Denver metro area, have increased greatly. It’s still possible to get these loans, of course, but lender scrutiny and requirements have vastly gone up.
If you haven’t refinanced, do so now! You can take advantage of all-time low rates. Many homeowners have done this. As Dan says, his office has been busier in the last nine months than it ever has.
If you haven’t refinanced, reach out to a lender to get details — it most likely will be a no-brainer decision!
The mortgage process has become faster
It’s fast to get a mortgage. The pandemic encouraged the digitization of much of the process. For example, PHM leverage a new system from Fannie Mae that allows it to link loan applications immediately with bank accounts to validate income and other sources to validate employment, income, assets and credit within minutes of application submission.
Borrowers can now sign most of the required documents digitally, with the exception of four, according to Dan: name affidavit, promissory note, deed of trust, first payment letter.
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Avoid mortgage forbearance if you can
While mortgage companies have offered mortgage holders the option of forbearance, you should avoid it if you can. The rules around reporting forbearance are not clear and these can hit your credit score and affect your future purchase and loan options.
As a seller, evaluate buyers’ preapprovals carefully
If you’re selling, make sure your agent closely evaluates the loan preapprovals of buyers who submit offers with financing. Because rules have changed so much and personal finances are in flux, these are critical components to evaluating offers properly.