After a long holiday weekend and with financial markets back to full throttle, mortgage rates eased lower on Tuesday, September 8, as investors weighed a jumble of economic signs. The gentle downward drift mirrors a persistent tug-of-war between optimism about a recovering economy and anxiety over a still-uncontrolled pandemic, even as the Federal Reserve signals that it will keep its foot on the gas for years to come. For borrowers, that combination translates into another day of unusually attractive borrowing costs, but also a reminder that rates can turn on a dime.
Mortgage Rates Edge Lower on September 8
NerdWallet’s daily rate data shows that all three of the most widely used mortgage products opened the trading week with lower averages. These rates are for well-qualified borrowers and include mortgage points, which are fees paid upfront to reduce the interest rate. Lenders also factor in credit scores, down payment size, and debt-to-income ratios, so the actual rate you receive may be higher or lower than the averages.
30-Year Fixed-Rate Mortgage
The 30-year fixed-rate mortgage averaged 3.04%, down from 3.07% at the end of last week. Borrowers who locked in this rate on Tuesday can expect to pay principal and interest of roughly $424 per month for every $100,000 borrowed. While the difference of three basis points seems small, over a 30-year term it can amount to thousands of dollars in interest. That is why even tiny improvements in mortgage rates matter to both homebuyers and refinancers.
15-Year Fixed-Rate Mortgage
The 15-year fixed-rate mortgage fell to an average of 2.61%, down from 2.64% on Friday. This shorter-term loan has grown in popularity during a period when many homeowners want to pay off their mortgage before retirement or build equity at a faster clip. The monthly payment on a 15-year loan is steeper than on a 30-year mortgage, but the interest savings over the life of the loan are substantial. For example, borrowing $200,000 at 2.61% for 15 years would save more than $60,000 in interest compared with a 30-year loan at 3.04%.
5/1 ARM
For borrowers who are comfortable with some uncertainty, the 5/1 adjustable-rate mortgage averaged 3.10%, down from 3.12%. This loan offers a fixed rate for the first five years and then adjusts annually based on a benchmark rate plus a margin. ARMs can be a smart choice for those who plan to sell or refinance within five years, but they carry the risk of higher payments if rates rise later. In today’s low-rate environment, the initial savings on a 5/1 ARM are narrower than they have been in past cycles, so careful calculation is needed.
Why Are Mortgage Rates Trending Downward?
Mortgage rates are not set directly by the Federal Reserve. Instead, they follow the broader bond market, particularly the yield on the 10-year Treasury note. When investors are worried about the economy, they buy Treasuries, which pushes bond prices up and yields down. Lenders then use those yields as a benchmark, lowering mortgage rates in response. On Tuesday, Treasury yields remained under pressure after a choppy session on Friday and a holiday weekend that gave investors extra time to reassess the economic outlook.
The latest jobs report, released on September 4, showed that the unemployment rate fell to 8.4% in August, but the pace of hiring slowed compared with the previous month. Nonfarm payrolls added 1.37 million jobs in August, down from 1.73 million in July, and many economists worry that the recovery is losing steam. The report also showed permanent job losses rising and long-term unemployment increasing, which keeps pressure on the Federal Reserve to maintain accommodative policies. The Fed’s new approach to inflation, which allows prices to rise above its 2% target for a period of time, has also made long-term bonds less attractive, putting additional downward pressure on yields and mortgage rates.
Another important factor is the Federal Reserve’s ongoing purchase program for mortgage-backed securities, or MBS. The Fed has been buying billions of dollars of MBS each month to keep credit flowing in the housing market. This direct demand for mortgage debt supports the price of MBS and, in turn, helps keep interest rates lower than they might otherwise be. As long as the Fed remains in the market, the floor under mortgage securities is likely to hold, insulating borrowers from sharp, sudden rate increases.
Mixed Signals Keep Borrowers Guessing
The phrase “mixed signals” may be the best way to describe the current market environment. On one side, the housing market has been one of the best-behaved sectors of the economy through the pandemic. Mortgage applications for home purchases have surged above year-ago levels, and builders report strong traffic from buyers looking for more space as remote work becomes more common. Housing starts and building permits have rebounded, and existing-home sales have recorded several months of robust growth.
On the other side, jobless claims remain historically high. While initial claims have fallen from their peaks in March, the number of Americans filing new claims each week is still far above pre-pandemic levels. Continuing claims have also remained elevated, and a record number of workers are receiving unemployment benefits under pandemic-related programs that are set to expire without congressional action. Retail sales cooled in midsummer after a surge in May and June, and the service-sector recovery has been uneven. Restaurants, hotels, and entertainment venues continue to struggle, and many economists expect a slow, afterburner-style recovery that will leave the labor market weak for years.
Consumer confidence numbers published in early September also told a confusing story. While headline confidence rose, expectations for future economic conditions actually fell among households earning less than $50,000 per year. That split deeply matters for mortgage rates, because spending by lower- and middle-income households drives a large share of overall economic growth. If those households are worried about what comes next, their caution can reverberate through the broader economy, keeping bond investors in a defensive posture and supporting lower yields.
Another source of mixed signals is the federal government’s fiscal toolbox. Republicans and Democrats have struggled to agree on another round of stimulus, and the long-running stalemate in Washington has added a layer of uncertainty. At various points in the summer, boom times in the stock market were supported by hopes of massive relief packages, and at other times, by the Fed’s emergency lending programs. On Tuesday, equities were muted while tech shares wobbled, and bond investors found little reason to push yields higher. The lack of a clear fiscal path forward means the Fed may have to do even more, which would likely keep mortgage rates low well into the future.
What Low Rates Mean for Homebuyers
For homebuyers, the current rate environment is about as favorable as any in living memory. A 30-year fixed-rate loan at 3.04% means significantly lower monthly payments compared with a few years ago. Lower rates can also expand your purchasing power. The same monthly budget that covered a $300,000 mortgage at 4% in 2019 can now support a $350,000 loan at 3.04% today, assuming the same down payment and property taxes. That increased purchasing power might help you afford a larger home or one in a more desirable neighborhood.
However, low rates have also contributed to the rapid appreciation of home prices across much of the country. The pandemic has accelerated the desire for larger living spaces, suburban and exurban locations, and climate-friendly features. As a result, bidding wars have become more common in moderately priced markets, and some buyers are discovering that the savings from a low mortgage rate are partially offset by a higher purchase price. It is essential to shop with a clear budget, get preapproved, and factor in higher insurance and property tax costs, especially in areas where demand is strongest.
Refinancing Opportunities in a Low-Rate World
For existing homeowners, refinancing may be the better opportunity. With rates at record lows, millions of U.S. households could refinance and reduce their monthly payment by hundreds of dollars. The rule of thumb is to make sure that the savings offset the closing costs before you break even. For example, if your monthly payment drops by $200 and closing costs are $4,000, your break-even period is 20 months. If you plan to stay in the house beyond that period, refinancing makes sense.
Today’s low rates also make it a good time to consider shortening your loan term. Tenants who refinance from a 30-year mortgage to a 15-year mortgage can build equity faster and save tens of thousands of dollars in interest, without a dramatic increase in monthly payment if they started with a relatively high rate. Cash-out refinances are popular too, allowing owners to tap their home equity for renovations, debt consolidation, or unexpected expenses. But it is wise to borrow carefully, because extending your loan term or taking cash out can increase the total interest cost and lengthen the time it takes to own your home free and clear.
Mortgage Rate Outlook for Fall 2020
The weeks ahead are unlikely to bring a dramatic rise in mortgage rates. The Federal Reserve has expressly committed to low interest rates for at least the next couple of years, and its ongoing purchase program for mortgage-backed securities is specifically intended to keep housing credit cheap. Most economists expect the 10-year Treasury yield to stay in a narrow range, as coronavirus concerns continue to act as a ceiling for yields and hopes for a vaccine act as a floor.
Still, surprises happen. A faster-than-expected vaccine rollout, a stronger jobs rebound, or a sudden spike in inflation could cause bond yields to shoot up, taking mortgage rates with them. On the flip side, a renewed wave of pandemic shutdowns or a political shock could send yields tumbling to even lower levels. The key for borrowers is to understand that locking in a rate at these historically low levels makes sense if you can comfortably afford the loan and you are financially prepared for years of regular mortgage payments.
At the end of the day, lower rates are more than just numbers on a screen. They represent real savings for families, a lifeline for stretched homeowners, and a catalyst for a housing market that has been a surprisingly steady engine during a turbulent time. The mixed signals that influenced Tuesday’s move are unlikely to disappear overnight, but today’s lower rates offer a tangible benefit for anyone ready to take the next step in their homeownership journey.
