U.S. Mortgage Rates Plunge to 5.3% in Biggest Drop Since 2008

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  • Mortgage rates experienced the biggest drop since 2008.
  • They fell 7% over the course of a week.
  • Despite this substantial decline, rates are above where they were a year ago.

Should home buyers jump on falling rates?

Home buyers have been experiencing a difficult time recently in the United States. Home prices remain high, despite some recent signs of the market cooling, and mortgage rates have nearly doubled since the heart of the COVID-19 pandemic.

But this week's news from Freddie Mac could provide some relief. Freddie Mac is a government-sponsored entity that purchases mortgages on the secondary market and tracks mortgage rates. It reported on Thursday that the average interest rate on a 30-year fixed-rate home loan experienced the biggest weekly decline since 2008.

This sudden drop in mortgage rates could potentially provide an opening for borrowers to lock in a rate at a substantially reduced cost compared with what home buyers have been paying for loans in recent weeks.

How much did mortgage rates fall this week?

According to Freddie Mac, mortgage rates declined to 5.30% this week. This is down from 5.70% last week. That's over a 7% drop in financing costs in just one week's time. It's also the biggest decline in rates since 2008.

This is a welcome change as rates have been steadily rising over the course of the past two years. Freddie Mac's data shows rates were at 2.67% on December 31, 2020 and have moved up nearly every week since then.

The rising costs of borrowing have pushed some potential buyers out of the market, especially as the rapid growth in home prices driven by constrained supply and high demand during the pandemic has left many people paying higher costs to purchase a home.

A rate drop of this magnitude could have a real impact on monthly payments. For each $100,000 in mortgage debt, the typical borrower could save $20 per month or $240 per year. Of course, this is still much more expensive than the loans borrowers were being offered last year. But those who are currently in the market for a property who have been contending with rapid rate increases will appreciate the big decline.

Why did mortgage rates fall and will the trend continue?

Although borrowers may be excited to see a big rate decrease, the decline was driven by fears of a recession that spurred an increased interest in investing in U.S. Treasuries. Mortgage rates closely follow the benchmark index on treasury notes because both cater to the same type of investors, and treasury yields fall as prices increase.

It is difficult to predict whether continued fears of an economic slowdown will further drive down treasury yields and mortgage rates, so borrowers may not necessarily want to wait for additional rate declines -- especially as this week's rate decrease was the most substantial one in more than a decade.

Borrowers who don't want to take a chance that rates will fall further should consider working with a mortgage lender to lock in at current rates. Borrowers also have the ability to pursue a float-down option that will enable them to lock in at today's current rates but also take advantage of any declines -- although there is a fee associated with this option in most cases.

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