Mortgage rates drop to lowest level in nearly 3 years

In an effort to improve housing affordability, President Donald Trump announced on social media Thursday that he has ordered mortgage giants Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds.

“This WILL drive Mortgage Rates DOWN, monthly payments DOWN, and make the cost of homeownership more affordable,” the Truth Social post said.

Mortgage rates on Friday fell 22 basis points to 5.99%, reaching the lowest level since Feb. 2, 2023, according to Mortgage News Daily.

Fannie Mae and Freddie, which are in state conservatorship, do not use home loans. They buy loans from lenders, package them into mortgage-backed securities (MBS), and sell them to investors; thus replenishing lenders’ funds for new loans and keeping interest rates lower and more stable for home buyers.

Buying more mortgage-backed bonds or securities lowers mortgage rates. While the markets were shaken in the first two months of the Covid epidemic, the Federal Reserve purchased $580 billion from the MBS agency. He then continued to purchase more throughout the year. From March 2020 to June 2021, the Federal Reserve increased MBS holdings from $1.4 trillion to $2.3 trillion, according to the Dallas Fed.

The Federal Reserve also cut its own lending interest rate to zero. This combination pushed the average interest rate on a 30-year fixed mortgage to record lows, reaching just 2.75% at the beginning of 2021, according to Mortgage News Daily.

“How big is a $200 billion deal? It depends on a number of factors, but the reaction in the MBS market is enough to tell you it’s a big deal,” said Matthew Graham, chief operating officer of Mortgage News Daily, which follows interest rates closely and has already seen them decline since the announcement news.

While it’s not yet known how quickly this will start and how long it will last, analysts are predicting where mortgage interest rates could end up; Most put the decline at between 25 and 50 basis points, some even lower.

Analysts at UBS wrote, “We believe the $200 billion purchase of MBS could lead to a decline in mortgage rates of approximately 10-25 basis points, potentially reducing the current 30-year basic mortgage rate to approximately 6.0% (current 6.21%). While still higher than the average outstanding mortgage rate of 4.4% and January 2022 levels of 3.25%, this decline will add to both new construction demand and existing home turnover.” can provide support,” he wrote.

Simply put, even if rates drop to 5.9 percent, someone buying a median-priced home (about $425,000, according to the National Association of Realtors) using a 30-year fixed mortgage with a 20 percent down payment will see their monthly payment drop by $118. For some, this may not seem like much, but for first-time buyers on the verge of purchasing, this can make a difference. But they’ll still need to save for a down payment, which is currently the biggest hurdle for most first-timers.

Homebuilder stocks rallied on the news, but before that they were already dropping mortgage rates to the 5% range. Lately their concerns have focused more on rising costs from tariffs and ongoing labor shortages. However, this news alone could have an impact on buyer demand for builders.

“I think it will help psychologically,” said Ivy Zelman, vice president of research and securities for Zelman, a Walker & Dunlop Company. “I think today people may step into the market who didn’t know that builders were offering reductions in mortgage rates and were researching these offers.”

But Zelman also points out that it’s not just mortgage interest that’s keeping buyers on the sidelines in the broader domestic market, but overall affordability. Consumers are nervous, and home prices are almost 50% higher than before the pandemic, ironically due to record-low mortgage rates brought about by MBS purchases.

“That’s not enough for the market to move forward because we know people can’t even qualify at 4.99 percent. They might say mortgage rates are going to drop below five, but we still have people who can’t qualify for 4.99 percent, so I think there’s more work to be done,” Zelman said.

This could also help builder margins, which have been shrinking recently due to higher costs.

“From a demand perspective, [it is] “There may be a marginal benefit to the positive psychological impact on consumers,” said UBS analyst John Lovallo. “There’s a greater potential for builders to start to pull back incentives to some degree that would increase their gross margins a lot.”

But the decline could also help existing homeowners save money on their monthly payments through refinancing. Rates are already falling steadily; The 30-year fixed rate is down from the last peak of 7.16% a year ago. According to the Mortgage Bankers Association, applications to refinance a home loan were already 133% higher than the previous year before this announcement.

The general rule of thumb is that refinancing is only worth the cost if you can save more than 75 basis points on your mortgage interest rate. This will add many more potential candidates to the refinancing pool, especially those who have used loans in the last two years. But the vast majority of homeowners still have rates below 4%.