These days, mortgage rates are the lowest they've ever been. At an average of 3.5% for a 30-year fixed loan, many buyers are taking advantage of these low rates to purchase the home of their dreams. Others, however, are asking themselves, "Will mortgage rates go down even further?"
How mortgage rates are determined
Before answering the question of whether mortgage rates will continue to drop, it’s important to understand what causes lowered rates in the first place. Mortgage rates are a complicated process determined by a number of things, including:
- Secondary mortgage market. This is a massive market where mortgage loans and bought and sold by banks, investors, and aggregators (third party investors). These investors contribute to interest rates by determining how much they are willing to pay for loans.
- The economy. Economic factors such as inflation rates and the overall state of the economy determine interest rates. The Federal Reserve can lower rates to help spur the economy and encourage spending. It can also raise rates to slow spending. This is done to help suppliers keep up with demand.
- Competition. Investors want to put their money where they’ll get the greatest return, and homeowners want the lowest interest rates. Lenders will lower interest rates in order to be competitive and attract more business.
While there are many factors that influence mortgage rates, these are some of the main reasons.
Mortgage rates today
The financial crisis of 2008, as well as the burst of the housing bubble, caused major problems for the housing market. Home prices lowered significantly, in many cases making the home worth less than what owners owed for it. Foreclosure rates were at an all-time high, and no one wanted to take the risk of purchasing a home.
This is part of the reason interest rates are so low. In order to encourage spending and boost the economy, mortgage rates dropped to the lowest they’d been in decades, and they continued to drop.
Will mortgage rates go down?
Those who are waiting for mortgage rates to go even lower shouldn’t wait too long—according to many financial experts, mortgages are not expected to fall below 3.25%. There are a number of theories behind this, including:
- Increased fees. Some financial experts believe interest rates will stay the same because the Fed is planning on raising fees that mortgage lenders must pay. Lowering interest rates further would cause lenders to lose money.
- Demand. As mentioned earlier, interest rates are lowered sometimes because lenders compete for business when demand is low. Because the demand for mortgages right now is so great, banks have no reason to lower interest rates further.
- More profit. Another reason some believe mortgage rates won’t drop is simply because banks want to make more money. When they sell mortgages to the secondary mortgage rate, they make more money when interest rates are higher.
Getting the lowest rate possible
Regardless of how low interest rates drop, you still have control over the rate you pay. You can help ensure you get the best rate possible by doing the following:
- Keeping your credit score up. The better your credit score, the lower your mortgage rate will be.
- Consider other options. While 30-year fixed rates are low, oftentimes adjustable mortgage rates are even lower. This can be risky, especially when rates are expected to go up, but it’s something to consider.
- Shop around. It’s still smart to shop around. Even a few decimal points lower on your mortgage can make a difference.
Based on these predictions, if you would like to purchase a home in the near future, now is a great time to do so.