Mortgage Rates – The Outlook For 2020 And Beyond

For Real Estate Investors (REIs), the cost of borrowing money to finance investment property is a critical component of their business model. While some of us own our investment properties outright, the majority of rental assets are leveraged. Let’s take a look at where mortgage rates currently stand in Westchester County:

Average conventional fixed-rate mortgages (as of 9/19/2020):

Term Rate APR
30-year fixed 2.990% 3.058%
20-year fixed 2.990% 3.086%
15-year fixed 2.375% 2.497%
10-year fixed 2.375% 2.554%

Historically, anything below 3% on a 15 to a 30-year mortgage is a good rate. Some of us are old enough to remember mortgage rates at 15% plus in the early 1980s when inflation ran amok. For the past ten years or so, mortgage rates have been on a downward trend. Will these low rates last?
Mortgage rates are tied most closely to the cost of borrowing money generally. The Federal Reserve has, essentially, dropped the cost of banks borrowing money from each other to 0%. This is not new news – we’ve basically been at a net-zero Fed Funds Rate for 5 years. The bond market, where governments and companies go to borrow money, has also been remarkably strong over the past decade. When bond price rise, yields (the interest rate) drop.
Generally speaking, low interest rates and plentiful capital produce low mortgage rates. That said, there are some potentially troubling aspects of this rosy picture that deserve further comment and analysis.

Will we ever see inflation rise again? It’s a fair question. The Federal government is printing money and adding debt like crazy – 5 trillion-plus in new spending so far in 2020 (The “Stimulus” bills). In traditional economic theory, that’s a cause for concern. Why?
The more money in circulation (in theory), the less valuable it is. Without getting too far into the weeds, remember that the U.S. Dollar is not tied to any real standard. There is not a massive pile of gold stored in Ft. Knox backing up our currency. The dollar floats (it’s called a “fiat” currency). Its worth is determined on exchanges – just like stock prices, bond prices, and commodities.

Should we be worried that people might wake up one day and say, “I no longer have faith in the dollar?” That’s possible but unlikely. Can the government keep borrowing and spending like the proverbial “drunken sailor”? Again, no one knows where the limit is. Washington, D.C. is now borrowing money at levels (in relation to GDP) not seen since the Second World War.
Housing prices (generally) are strong. The economy is quickly recovering from the COVID flash recession. Homebuilder confidence is high. On balance, the reasons to believe that mortgage rates will stay below 4% (perhaps below 3%) for the next 24 months are persuasive. Will we be rocked by another wave of COVID cases later this Fall and Winter? Who knows, but the signs on the COVID front are encouraging – case counts, hospitalizations, and deaths are all down. A vaccine appears to be coming within a few months.
Be aware of one negative on the mortgage horizon. As of December 1st, 2020, lenders are required to collect an 0.5% “adverse market fee” on every refinanced mortgage sold to Fannie Mae or Freddie Mac. What’s this all about?

The government is expecting a wave of mortgage defaults due to the COVID caused economic downturn. The “adverse market fee” is designed to offset those expected losses (at least in part). For a $280,000 mortgage, an 0.5% fee means an additional $1,400 in cost when the loan is sold to Fannie or Freddie. The 0.5% fee applies ONLY to re-fis, not to new purchases (for now). So, if you’re considering refinancing a property, close before December 1st to avoid the extra expense.

If you have a residential property or properties in Westchester County that you are interested in renting, now is the time to put them on the market. At Sterling Property Solutions, we have a team in place that can answer all your questions and address any challenges. If you are already a landlord and no longer have the time or desire to handle rental property management on your own, we can help. Maybe your current property management company is not giving you the top tier service you deserve. If so, reach out. We are there for you.

Please give me a ring at 914-355-3277 or send me an email at [email protected]. Together, let’s form a plan for you to take full advantage of the current conditions and put in place a robust, long term program for your success.