Mortgage interest rates have been on a steep decline since the COVID-19 pandemic started, and as a result, there is a surge in mortgage refinancing.
“Low interest rates have created the busiest mortgage environment we have seen,” said Matt Muscat, director of marketing at Treadstone Funding, a residential mortgage lender in Grand Rapids. “We are seeing double to triple the amount of refinance transactions that we were seeing in years previous, while purchase mortgages are also up.”
Scott Setlock, senior vice president, mortgage and consumer lending for Mercantile Bank of Michigan, said they began seeing interest rates decrease significantly starting between late February and the beginning of March. That decrease translated in their clients conducting more refinancing either by lowering their monthly payments or reducing the length of their mortgage — going from a 30-year mortgage to a 15-year mortgage.
Mortgage rates fluctuate daily, but they have been on a downward trajectory this year. According to the Federal Home Loan Mortgage Corporation, better known as Freddie Mac, the interest rate in March 2019 for a 15-year fixed-rate mortgage averaged 3.72%. In March 2020, when the pandemic surfaced, the mortgage interest rate dropped to 2.89%.
In November 2019, the interest rate on a 15-year fixed mortgage was 3.16%. Fast forward to November 2020 and the mortgage interest rate averaged 2.31%.
The 30-year fixed-rate for mortgages averaged 4.27% in March 2019 compared to 3.45% in March 2020. The decline continued as mortgage rates averaged 3.7% in November 2019 and 2.77% in November 2020.
At Mercantile Bank, Setlock said in the first nine months of 2019 the bank closed $124.3 million in refinance loans while that number skyrocketed to $447.9 million in the first nine months of this year.
“For us, we more than tripled what we did last year,” he said. “Because there has been such a big decrease in rates, we’ve really seen people across the dollar amount spectrum choose to refinance this year and we know that there are a lot of clients out there that can benefit from a refinance. We tend to see that the higher your mortgage balance is, the more incentive you have to refinance because you can save more in interest costs. There is some cost associated with closing a mortgage and so the higher your mortgage balance is the easier it is to cover that fixed cost of doing the mortgage.”
Setlock said the decrease in mortgage rates this year clearly is triggered by the pandemic.
“A lot of the ripple effect may have been caused by the pandemic,” he said “The Federal Reserve has been involved and there have been talks about stimulus plans this year and every time there has been some big economic news that comes out, it will typically drive what is happening in the rate environment. One of the big impacts on the mortgage rates that we see is that the Federal Reserve is buying mortgage bonds. When they buy mortgage bonds, it helps the mortgage rates be lower than they otherwise would be. So that has been a driving force as well, but they are doing that and increasing their purchases because of the COVID pandemic.”
While Muscat said he thinks the overall downward trend in lower interest rates has been around longer than the pandemic, like Setlock, he also said it is likely that the Fed’s decision to keep rates low is at least partially the result of the labor/economic changes related to the pandemic.
Low rates have spurred a mortgage volume milestone. According to AJ Harma, first vice president of mortgage lending at Independent Bank, the 2020 mortgage volume nationally is now $4.1 trillion. In 2019, the mortgage volume was $2.4 trillion. The previous record was $3.8 trillion in 2003. The 2021 mortgage volume is projected to be $2.7 trillion.
“The expectation is that once we see the vaccine, then it is likely that we will see the economy recover in a real way, which will likely lead to an increase in interest rates,” he said. “How much or how fast — that is the million-dollar question.”
“What consumers need to know is that although demand has never been higher for mortgages, low rates make home ownership more accessible,” Muscat said. “For current homeowners, refinancing, if they haven’t already, is something to look into to either save money on their monthly payment, or possibly lower the number of years left on their loan and pay their home off at a faster pace. For those looking to get into the home market — although housing inventory in Kent County is tight — low interest rates are making now one of the best times ever to buy a home.”