The Big Picture to Low Interest Rates
If you're watching the economy or the news, you're likely aware interest rates are currently at a historical low. These rock-bottom interest rates mean, for many home buyers, there's never been a better time to buy. According to Freddie Mac, 30 year interest rates for fixed rate mortgages have fallen to an average of just 2.98 percent for the first time in nearly fifty years. 15 year fixed rate home loans are also now below 3%. However, with the questionable economy and effects of COVID-19 still being felt around the world, lenders are also becoming increasingly picky about who qualifies for home loans and some lenders have temporarily eliminated home equity lines of credit and refi's.
The New York Times reports:
JPMorgan Chase, for example, will make mortgages to new customers only with credit scores of 700 or more (up from 640) and down payments of 20 percent or higher. USAA has temporarily stopped writing jumbo loans, which are mortgages that are generally too large to be backed by the federal government, among other products. Bank of America said it had also tightened its underwriting, but declined to provide details.
Ms. Smith and her husband, Philip Ellis, had hoped to go through a first-time homebuyer program at Wells Fargo that would require them to put down 3 percent. They even sat through a required educational course. But two weeks before closing on their $205,000 home, their lending officer said they needed to put down 5 percent to keep their rate.
A week later, Ms. Smith said, they learned their loan was for less than what they had been preapproved for — and they needed to come up with an additional $4,000. In the end, their down payment and closing costs exceeded $14,000 — about 45 percent more than they had anticipated.
The couple, who had married in April, used money recovered from their canceled wedding reception. Ms. Smith said they were also lucky to have the support of their families, who fed and sheltered them so they could save every penny. But the stability of their jobs was also most likely a crucial factor.
“I think our ability to secure the loan was due to us both being schoolteachers and having a contract for employment already for the following year,” she said.
Wells Fargo said it hadn’t increased its credit score requirements, but it has raised down-payment minimums on certain loans not backed by the government because it had to suspend most interior appraisals of homes during the pandemic. Even under normal circumstances, there are a variety of situations in which borrowers may be asked to raise their down payment or obtain a better rate by doing so, a company spokesman said.
Some lenders also want to know more about borrowers’ other possible sources of cash.
When Chris Eberle, a technology executive, and his wife were locking in their jumbo mortgage for a new home in Palo Alto, Calif., their lender, a California mortgage bank, wanted to know not only how much they had in their retirement accounts but how easy it was to get at that money.
“They wanted, account by account, details on the withdrawal and loan options,” Mr. Eberle said. And they, too, had to put down more than they had planned. Before the crisis, a jumbo loan could be had with 10 percent down. Mr. Eberle said they had to put down 20 percent — and found a cheaper house to make it easier. Other borrowers, including the self-employed, are being asked to provide more detailed proof of their earnings — at least when they’re getting a loan that will be backed by Fannie Mae or Freddie Mac.
“Employment and income verification for self-employed borrowers is now multiple times more detailed as it previously was,” said Ted Rood, a loan officer in St. Louis who lends nationally. Income verification is also more rigorous across the board, and Mr. Rood said he was required to do two verifications over the phone. It makes sense, he said: He had just prepared a loan for a married couple — a gym owner whose income had suffered and his wife, a speech therapist with a seemingly more stable position because she was able to work with clients remotely.
“We were set to close on a Monday in early June,” said Mr. Rood, who was working at Bayshore Mortgage Funding, which is based in Timonium, Md., at the time. But when the loan processor called the wife’s employer the Friday before, the processor learned that the woman had been laid off.
The lender withdrew the loan.
Assuming you can get a loan, you can partake in the historically low interest rates. But what if you aren't in the market for a purchase or refi? Low interest rates play an impact on your savings as well. Average percentage yields or the amount paid by banks on basic federally insured savings accounts fell to just 0.05 percent in September. So yes, you may be able to borrow for less but any savings you do have won't yield you much return. To provide prospective, if you had $10,000 in a savings account, at 0.05 percent interest, you would earn just $5 per year on your money!
Looking for a larger return? It's going to come with more risk. For more information visit https://www.nytimes.com/2020/09/18/your-money/savings-interest-rates.html or speak to your financial advisor.