Mortgage Rates are Dropping - What Should You Do?

Mortgage rates have recently seen a decline, creating an advantageous situation for investors, particularly international buyers. At the start of the pandemic, mortgage rates were near record lows, around 3%. However, as inflation surged and the Federal Reserve implemented a series of aggressive interest rate hikes starting in March 2022, rates climbed significantly, peaking at around 7.62% in October 2023. Now, with rates projected to ease to approximately 6.77% by mid-to-late-July 2024, this period presents a unique opportunity for investors to secure favorable financing terms​ ​.

Recent data shows a noticeable decline in mortgage rates:

• July 10, 2024: The average rate for a 30-year fixed mortgage was 6.98%, down 0.04% from the previous week, and the 15-year fixed mortgage was 6.48%, down 0.06%.
• July 19, 2024: The average rate for a 30-year fixed mortgage further decreased to 6.82%, and the 15-year fixed rate dropped to 6.23%.

(The Mortgage Reports)(Money)

The State of the Market

Despite recent fluctuations, the U.S. housing market remains favorable for buyers. Recent data indicates a drop in mortgage rates from approximately 7% in June to around 6.77% in mid-July 2024. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.77% during the week ending July 18, the lowest level since mid-March. This decline is expected to boost demand, particularly among rate-sensitive investors, making it crucial to act before prices increase due to heightened competition.

How We Got Here

The pandemic era saw historically low mortgage rates, driven by aggressive monetary policies to stimulate the economy. These policies included lowering the federal funds rate and purchasing mortgage-backed securities, which significantly reduced borrowing costs. As the economy began to recover in 2021 and 2022, inflationary pressures mounted, leading the Federal Reserve to reverse course. They increased the federal funds rate to curb inflation, causing mortgage rates to rise sharply.

By the end of 2023, mortgage rates had reached their highest levels in over two decades, with the average 30-year fixed rate peaking at 7.62% in October 2023. However, as inflation began to cool in early 2024, the Federal Reserve paused its rate hikes, leading to a gradual decline in mortgage rates. As of mid-July 2024, the average 30-year fixed mortgage rate had fallen to 6.77%, providing a more favorable environment for homebuyers.

What Declining Rates Mean for Investors

For investors, particularly international buyers, declining mortgage rates translate to lower borrowing costs and increased purchasing power. This trend offers several strategic advantages:

• Lower Initial Investment Costs: Lower interest rates reduce monthly mortgage payments, making it more affordable to finance property purchases.
• Opportunity to Refinance: Investors can secure properties at current rates and refinance when rates drop further, potentially reducing their long-term financing costs.
• Increased Market Activity: Lower rates often lead to increased buyer interest, which can drive up property values over time. By purchasing now, investors can benefit from future appreciation.
• Favorable Purchase Environment: With the market currently favoring buyers, there is less competition, allowing investors to negotiate better terms and prices.

Securing the Lowest Interest Rate

International investors looking to capitalize on declining U.S. mortgage rates should consider the following strategies:

• Understand Rate Differences: International investors typically face rates that are up to 1% higher than those for primary homebuyers due to increased risk. Therefore, it's crucial to be aware of this differential when planning investments.
• Credit Score Impact: While a credit score may not be required for international buyers, having a good one can still help secure better rates. Building and maintaining a strong credit history can be beneficial.
• Higher Down Payments: A larger down payment can lead to better mortgage terms. International investors should aim for at least 20% to avoid private mortgage insurance (PMI) and secure more favorable rates.
• Loan Type and Term: Different loan types and terms come with varying interest rates. Fixed-rate mortgages provide stability, while adjustable-rate mortgages (ARMs) might offer lower initial rates. Evaluating these options based on market conditions and personal financial goals is essential.
• Debt-to-Income Ratio (DTI): Keeping a low DTI ratio signals to lenders that the borrower manages debt responsibly, which can help secure a favorable interest rate.

To summarize The current decline in mortgage rates presents a compelling opportunity for international investors. By understanding the market dynamics and leveraging factors within their control, investors can secure favorable rates and maximize their investment returns. Acting swiftly in this buyer's market can yield significant benefits, positioning investors to refinance for even better terms when rates reach their lowest points.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.