Emergency interest rate cuts by the Fed bring the potential for even lower long-term mortgage rates as well as relief for HELOC and ARM borrowers.

HOLDEN LEWIS & HAL M. BUNDRICK, CFP  March 17, 2020 From Nerd Wallet

The Federal Reserve has cut short-term interest rates by 1.5 percentage points in less than two weeks and is making sure that money keeps flowing through the mortgage financing system — all to protect the economy from more damage from the COVID-19 pandemic.

Here’s what this means for home buyers, homeowners considering a refinance, people with adjustable-rate mortgages, and anyone who wants to know whether they should lock a rate.

Why the Fed cut interest rates

Mortgage rates started falling weeks before the Fed’s first emergency rate cut of the year, on March 3. With that rate reduction of half a percentage point, the Fed was playing catch-up, following the lead of the market forces that set rates.

Then, on March 15, the central bank announced another rate cut of a full percentage point. This time, the Fed was leading rather than following. “The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the Fed said in explaining why it had slashed the target federal funds rate to a range of 0% to 0.25%.

The spread of COVID-19 has had devastating effects on economies around the world. In the United States, restaurants and bars have closed or lost much of their business; movie attendance has plunged, and some major theaters have temporarily shut down operations; airline travelers are canceling plans, and airlines are projecting billions of dollars in losses for 2020. The Fed rate cut is designed to stimulate the economy when the worst of the pandemic passes and people get back to work and get full paychecks again.

The impact on mortgage rates

Also on March 15, the Fed announced that it will buy at least $500 billion of Treasurys and at least $200 billion of mortgage-backed securities. This tactic, known as quantitative easing, is designed to keep money flowing through the financial system. The purchases of mortgage-backed securities are designed to make sure lenders have money available for home buyers and refinancers to borrow. It might have the side effect of pushing down on mortgage rates.

“Lower rates are likely to drive refinances higher and may entice home buyers out to shop as well. That’s certainly the Fed’s hope,” says Danielle Hale, chief economist for Realtor.com. “However, if buyers are hesitant to go shopping because they want to avoid contact with others, this could dampen home sales.”

There’s some evidence that home sellers and buyers are responding to the COVID-19 crisis by pulling back. Redfin CEO Glenn Kelman wrote in a blog post that the online real estate brokerage saw “a significant drop in demand from home buyers and sellers” in Seattle, an early epicenter of the epidemic in the United States.

If home sales weaken, refinances will keep lenders busy for a while. Current homeowners overwhelmed lenders with refinance applications in early March. During the week ending March 6, refinance applications increased 79% over the week before, to the highest level since April 2009, according to the Mortgage Bankers Association.

This increased demand for refinances arrived in reaction to a sharp drop in mortgage rates in early March, to their lowest since at least 1971. In NerdWallet’s daily mortgage rates survey, the average rate on the 30-year fixed-rate mortgage fell to 3.207% March 4.

Mortgage rates rebounded about half a percentage point within two weeks of hitting that low, as turmoil hit the financial markets. The quantitative easing is intended, in part, as a soothing mechanism.

The Fed’s March 3 and March 15 rate cuts are good news for those with or shopping for adjustable-rate mortgages and home equity lines of credit, which are guided by Fed rate movements. ARMs will likely see lower rates at their next reset period, and HELOCs could fall a total of 1.5 percentage points in the next billing cycle or two from a combination of the Fed’s half-point cut March 3 and the full-point cut March 15.

What to know if you’re:

Buying a home

If you’re in the market to buy a home, you probably face competition from other buyers because there aren’t enough homes for sale to meet demand.

There’s only so much that lower mortgage rates can do to stimulate home sales. Mortgage rates and affordability aren’t the biggest challenges in today’s housing market, Hale says. “A lack of options continues to be the largest hurdle,” she says.

Here are tactics that make you more likely to prevail in a hot housing market:

• Get a mortgage preapproval. A preapproval letter gives sellers confidence that you’ll be able to get a loan and that the sale will go through.
• Limit contingencies, such as requesting that the seller make repairs or pay your closing costs.
• Let the seller know that you can be flexible about the closing date if that’s possible.

If the fear of COVID-19 makes you reluctant to tour homes but you’re committed to buying this year, “now is the time to strike,” says Daryl Fairweather, chief economist for Redfin, an online real estate broker. “People who commit now are going to have an advantage over people who wait.”

Refinancing

Plenty of homeowners are refinancing now. Lenders are enduring heavy workloads. You can do your part to lighten the load by submitting a complete application, with all the necessary documentation. Online applications usually will let you know if you haven’t provided all the necessary documents.

Other tips:

• Know why you’re refinancing so you can get the right loan. It might be to get a lower monthly payment, to shorten the loan term, to replace your adjustable-rate mortgage with a low fixed-rate loan, to borrow more than you owe in a cash-out refinance or to get rid of FHA mortgage insurance.
• Shop more than one lender. You’re more likely to land the best possible deal if you apply with multiple lenders. Each lender will give you a disclosure document called a Loan Estimate. By comparing Loan Estimates, you’ll be able to identify the best offer.
• Lock your rate for long enough. During normal times, a 30- or 45-day rate lock for a refinance is sufficient to close the loan on time. But when so many homeowners are refinancing at once, it might behoove you to get a longer rate lock. Ask your loan officer for guidance.

Be careful of getting a cash-out refinance. “It might be tempting to take cash out, but especially if you’re worried about a recession in the future, or your job security, it might not be the best idea,” Fairweather says. You want to have a cushion, instead of taking out all your equity, she says.