Mortgage rates go down because lenders compete on price

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Market watchers are expected to mortgage rates by now it will grow to 4 percent. During the break for borrowers, the expected rate hike has not really started yet.

Instead, mortgage rates have been declining each of the past five weeks. Bankrate National Creditors Survey

One reason? Lenders are capitalizing on a landmark year in 2020 and have decided to offer borrowers better deals so they can compete for business.

“This is undoubtedly good news for consumers,” said Guy Sekala, publisher of Inside Mortgage Finance, a trade magazine. “This means we are likely to have a 3 percent or lower mortgage rate that will last a little longer than we thought.”

For homeowners looking for refinancingprice competition means that the window of opportunity remains open. Rates remain low enough that refinancing makes sense for more borrowers. And for buyers competing in the fast-growing housing market, even a slight cut in rates increases their purchasing power

“Every time there is intense competition, consumers win,” says Greg McBride, CFA, Chief Financial Analyst at Bankrate.

How lenders set mortgage rates

Calculating mortgage rates is tricky, but here’s one simple rule of thumb: A 30-year fixed-rate mortgage is exactly the same as a 10-year Treasury yield. When that rate goes up, a 30 year mortgage tends to do the same.

While the yield on 10 year olds and 30 year mortgage rate usually move in tandem, the relationship is not perfect. Last year, the gap was 3 percentage points, or 300 basis points, well above the normal range of 200 basis points.

Now the spread has narrowed to 155 basis points. According to Bankrate, this is the smallest gap in a decade.

Mortgage rates are influenced by other factors such as the demand for home loans and the ability of lenders to meet that demand. When mortgage lenders have too many businesses, they raise rates to slow down applications. When things go easy, they tend to cut rates to get more customers.

This is what is happening now. Last year, a sharp drop in rates and an unexpected housing boom fueled demand growth much faster than lenders were able to increase their headcount.

After hiring massively, lenders now have enough people to handle the heavy workload. But the mortgage refinancing boom has eased.

“Although the activity in buying mortgage loans is high, the refinancing activity is insufficient,” says Chekala.

After last year’s record $ 3.83 trillion in mortgages, volume is likely to fall 14 percent to $ 3.28 trillion this year, according to the Mortgage Bankers Association.

This leaves lenders a mystery. They would rather not fire people they just hired.

“Before they start laying off staff, they want to see what else they can do,” Chekala says. “The most obvious thing is to offer a better deal than the guy on the street.”

Strong returns give lenders some wiggle room

Lenders have done well in the past year. The Mortgage Bankers Association reported that the industry generated an average profit of $ 5,535 per loan in the third quarter of 2020, sharply higher than lenders’ $ 1,924 earned over the same period in 2019. However, by the fourth quarter of 2020, the average profit had dropped to $ 3,738.

The profit cycle is following a predictable pattern, says Gene Thompson, CEO of InterLinc Mortgage Services in Houston. Lenders save their profits during a boom like the one they experienced last summer and then return some profits as needed.

“When that volume starts to decline, we’ll see companies use some of their military stocks to chase volume,” Thompson says. “That’s when the situation in terms of profitability for lenders will start to change.”

This scenario is now being played out. Publicly traded mortgage stocks skyrocketed as industry profits surged. However, the shares of Rocket Cos. And UWM Mortgage recently suffered when this new reality became apparent.

Rocket, the parent company of Quicken Loans, the nation’s largest lender, reported a margin of 3.74 percent in the first quarter of 2021, down 4.41 percent in the fourth quarter of 2020. The company said it expects further declines in profitability in 2021. when the margin falls below 3 percent.

The trend has scared investors, but Rocket CEO Jay Farner says there is still plenty of room for maneuver. “Profitability, although returning to more than the historical average, is incredibly high,” he said during the announcement of the financial statements in early May.

What You Can Do To Get The Best Mortgage Rate

Do your research before contacting a lender. To secure the best mortgage rate, follow these steps:

  • Compare offers: This advice is especially relevant now that lenders are competing on price. “This is why it is so important shop aroundMcBride says. “Not all offer the same price, and some lenders may be motivated to be very price competitive.” Receive offers from at least three lenders… If you live in an area with limited competition from local banks, you may need to shop online. Pros: shopping comparison can save thousands of dollars during the term of the loan.
  • Look beyond ordinary lenders: The bank or credit union where you keep your cash may offer the best home loan deal, but be sure to do some comparison shopping. Closing rates and costs can vary greatly depending on the lender.
  • Improve your credit rating: Raising your credit is the best way to lower the rate, and it is more effective than increasing the down payment or improving the debt-to-income ratio. The best deals go to borrowers with a credit rating of 740 or higher.

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