The 30-Year Fixed-Rate Mortgage Drops to 6.77%: What It Means for Homebuyers
The 30-year fixed-rate mortgage has fallen to an average of 6.77% this week, marking its lowest level since mid-March and the largest weekly drop in basis points since May, according to Freddie Mac. Despite this decline, the Mortgage Bankers Association reports that the number of people applying for home loans continues to decrease, remaining about 5% below the spring levels when rates were similar.
Why Are Homebuyers Hesitating?
Sam Khater, Freddie Mac’s chief economist, explains, “Sometimes as rates decline, demand weakens, driven by buyers waiting to see if rates will drop further before deciding to purchase.” Additionally, Lisa Sturtevant, chief economist at Bright MLS, points out that home sales tend to slow during the middle of summer, but affordability is a more significant barrier. Record-high home prices in many markets are keeping some buyers on the sidelines.
Affordability Challenges Persist
Jessica Lautz, deputy chief economist at the National Association of REALTORS®, illustrates the impact of the current rate: at a 6.77% average rate, a homebuyer with a 20% down payment would have a $2,080 monthly mortgage payment on a $400,000 home. For a 10% down payment, the monthly mortgage payment would be $2,340. While lower rates help with the affordability equation, high home prices remain a substantial obstacle.
Positive Signs for the Housing Market
Khater notes that mortgage rates are trending in the right direction, and the resilient economy is a positive sign for the housing market. The recent drop in rates follows a favorable inflation report and growing expectations that the Federal Reserve may cut its key benchmark rate in September. If mortgage rates continue to decline, more buyers and sellers may return to the market, potentially bringing a more balanced market after years of imbalance, according to Sturtevant.
Current Mortgage Rate Averages
Freddie Mac reports the following national averages for the week ending July 18:
30-year fixed-rate mortgages: 6.77%, down from 6.89% last week. A year ago, the average was 6.78%.
15-year fixed-rate mortgages: 6.05%, down from 6.17% last week. A year ago, the average was 6.06%.
Choosing the Right Mortgage Type and Term
When selecting a mortgage, it’s essential to consider the loan term, which dictates the payment schedule. The most common terms are 15 and 30 years, though 10-, 20-, and 40-year mortgages are also available. A fixed-rate mortgage offers stability with a consistent interest rate for the duration of the loan. In contrast, an adjustable-rate mortgage (ARM) has a fixed rate for an initial period (commonly five, seven, or 10 years) before adjusting annually based on market conditions. Fixed-rate mortgages are generally better for long-term living plans, while ARMs might offer lower initial rates but carry the risk of higher rates later.
30-Year Fixed-Rate Mortgages: Today’s average rate is 6.87%. This term often has a higher interest rate than a 15-year mortgage but comes with lower monthly payments.
15-Year Fixed-Rate Mortgages: Today’s average rate is 6.33%. While the monthly payments are higher, the interest rate is lower, allowing for less interest paid over the loan's life and quicker payoff.
5/1 Adjustable-Rate Mortgages (ARM): Today’s average rate is 6.58%. The initial five-year period typically offers a lower interest rate, but rates adjust annually after that. An ARM could be beneficial if you plan to sell or refinance within five years.
Why Are Mortgage Rates High Right Now?
During the pandemic, mortgage rates hit record lows around 3%. However, as inflation surged, the Federal Reserve initiated aggressive interest rate hikes starting in March 2022, indirectly driving up mortgage rates. Currently, rates hover around 7%, influenced by economic data and investor expectations regarding future Fed rate cuts.
Will We See Lower Mortgage Rates in 2024?
Most experts predict mortgage rates will dip below 7% in the coming months, contingent on upcoming inflation and labor data. Although the Fed hasn't hiked rates in nearly a year, a rate cut might occur as early as July, though more likely in September or November. Selma Hepp, chief economist at CoreLogic, suggests that if the Fed signals a move, mortgage rates could drop to around 6.5% by year-end. However, a return to the 2-3% rates seen a few years ago is unlikely.
Conclusion
While the recent drop in mortgage rates to 6.77% offers a glimmer of hope for homebuyers, high home prices and affordability challenges continue to temper market activity. As the economic landscape evolves, potential further declines in mortgage rates could encourage more buyers and sellers to engage, moving the market toward a more balanced state. For now, the housing market remains in a state of flux, with affordability and rate trends closely watched by industry experts and hopeful homebuyers alike.
