Mortgage interest rates have hit another record low this week.
Mortgage applications for purchases just hit an 11-year high.
Rates are at a level that many people could never have imagined.
Here’s something that is surprising to many people…
Rates are 1.5% lower than they were just two years ago.
Here’s what that means for buyers…
Pretend someone is looking at a $500,000 home and they will have a 20% down payment.
The difference in monthly payment is $320 between two years ago and today.
Obviously that is a significant amount of money.
Imagine what a person could do with $320 per month.
The fact that rates are at record lows is one of many reasons that the market is so strong right now and prices continue to appreciate at healthy levels.
If you’ve suddenly been hit with a home improvement project that’s pinching your budget, like a roofing issue or heater malfunction, a personal loan might be an option to help cover the cost.
What is a personal loan?
A personal loan is an installment loan that’s typically issued by a bank, credit union or online lender. According to the Federal Reserve, the average interest rate on a two-year personal loan is 10.22% but varies depending on your credit score and other criteria. Some lenders offer repayment terms anywhere from 12 months to five years.
A benefit of using a personal loan for emergency home improvement projects is that the approval process is generally quick so you can address urgent home repairs sooner. Some online lenders can run a credit check, approve your application and send funds your way with a couple of days. The approval process for banks and credit unions, on the other hand, can take anywhere from a couple of days to a couple of weeks, if the lender needs additional information.
How to find a personal loan
If you’ve decided that a personal loan makes sense to fund your next home project, make sure you’re aware of these next steps.
1. Assess your budget
The last thing you need is taking out a personal loan only to realize after the fact that you can’t afford to repay it. Calculate how much you realistically need for your home improvement project, giving yourself a reasonable buffer for unforeseen repair expenses (e.g. permit fees, price changes for a specific material, etc.)
Then, tally your monthly income and financial obligations to ensure you still have enough cash on hand to keep the lights on and make monthly installments toward your loan. Using a spreadsheet or budgeting app can help you track these numbers easily.
2. Know your credit score
Generally, you need a good credit score to get approved for a personal loan. Your credit score is one of the key factors that lenders use to determine whether your application is approved, and a higher credit score results in a lower interest rate offer.
Check your credit score with the three credit bureaus to ensure there isn’t an error or suspicious activity that might inadvertently lower your credit score. For a free credit report, go to AnnualCreditReport.com to see where your credit stands before moving forward in the process.
3. Compare rates and terms
When you’ve confirmed that you have a good credit score that can get you competitive interest rates, it’s tempting to accept a loan from the first lender that approves you. But like other major purchases, it’s important to shop around.
Compare interest rates, annual percentage rates (APR), and term durations available, and read the fine print for any conditions or fees that might offset any benefits.
To start, try reaching out to your existing financial institution first to see what they can offer; sometimes credit unions, in particular, offer rate incentives for loyal members. Also, consider using a personal loan aggregator website to compare offers from multiple online lenders at once (just do your due diligence to ensure the site is legitimate).
4. Submit an application
If you’re ready to submit an application, you can either complete a form online or apply in-person, depending on your lender. Although all lenders require different information to process a loan application, some common information to prepare ahead of time include:
- Personal information
- Employment information
- Reason for the loan
- Amount you want to borrow
To minimize any delays on your end, it’s helpful to prepare copies of verification documents, such as a driver’s license, proof of address like a utility statement, information about your home and pay stubs. Your prospective lender will likely reach out to you if they need any other information to make a decision.
Although it’s always best to have emergency savings set aside for a sudden home improvement project, turning to a personal loan is a useful option when you’re pressed for funds and time. As urgent as your project might feel, however, always take the time to do your research to ensure you’re making the right move for your situation.
There have only been two other times in history when rates have been this low- April 2013 and October 2016.
It’s interesting to see what happened soon after bottoming out these last two times.
In April of 2013 rates hit 3.41%. By August 2013 they had jumped to 4.40%.
Rates bottomed again in October 2016 at 3.42%. Just two months later in December 2016 they were 4.32%.
Each time the increase was nearly 1% within just a few months.
So, if history proves itself as a guide, we can’t expect these rates to last for long.
An interesting stat which can give some insight to the national market is the Home-ownership Rate.
It simply looks at the percentage of Americans who own their home instead of rent.
The most recent report from the Census Bureau shows the rate at 64.2%.
Most importantly, this number is showing stability after many years of change.
After many years of hovering around 64%, the Home-ownership Rate started increasing in 1996 and reached as high as 69.5% in 2005.
2008 started several years of declining back to the pre-1996 levels of 64%.
So today it’s back to what seems to be “normal” based the long-term average.
Just a few months ago most people thought mortgage rates were heading to 5% and now they are back to where they were a year ago.
You probably saw this week’s news from the Federal Reserve declaring that they would not raise their Federal Funds rate for the rest of 2019
(just three months after saying they would raise rates at least twice this year).
While this is big news, even bigger news for mortgage rates is that the 10-year Treasury yield just hit its lowest point since January 2018. One thing we’ve learned from our Chief Economist Matthew Gardner is that mortgage rates follow the 10-year treasury (not necessarily the Fed Funds rate).
Last Spring it looked like mortgage rates had bottomed out and they steadily climbed through the Summer and Fall of 2018. It looked certain that they would hit 5% around January.
Instead they started dropping. Now with the 10-year Treasury at a 15-month low, they just dropped a little more and they are back to where they were a year ago.
Great news for buyers! Party like it’s 2018!
One of the most common questions we hear from clients is “Where do you think interest rates are going?”
Virtually all of the experts we follow put rates above 5% going into next year and some see rates approaching 5.5% by the middle of 2019. What’s certain is that there are economic forces at work that are pushing rates higher.
So, how about a little history lesson? How do today’s 30- year mortgage rates compare to this same date in history going all the way back to 1990?
• Today = 4.85%
• 2017 = 3.94%
• 2015 = 3.82%
• 2010 = 4.27%
• 2005 = 5.98%
• 2000 = 7.84%
• 1995 = 7.75%
• 1990 = 10.22%
While today’s rates feel high only because they are higher than 2017, they are quite a bit lower than at many times in history.