The timing couldn’t have been better for mortgage rates to stabilize this week: The 30-year mortgage rate averaged 6.77% in the week ending March 27, a three basis point drop from the previous week. Remember, one basis point is equivalent to one one-hundredth of a percentage point.
Although a three-basis-point decrease may not seem like much, it put an end to a two-week trend of rising rates. This slight dip happened right in the middle of spring break season, just in the nick of time.
The timing of spring break varies throughout the country, and there isn’t readily available data on its impact on local housing markets. However, anecdotally, real estate agents will tell you that potential home buyers flood the market during and right after spring break.
If you’re about to start your home search in earnest, you’re in good company. In fact, the number of purchase mortgage applications has increased by 7% compared to the same week last year, according to the Mortgage Bankers Association.
More homes are on the market, too
“As rates continue to decline this spring – albeit at a slow pace – home buyer demand is on the rise,” stated MBA president and CEO Bob Broeksmit in a press release.
Fortunately, the increase in demand is being met with a growing supply. More homeowners are putting their properties up for sale, and houses are remaining on the market for longer periods. As of March 15, the number of active real estate listings nationwide was 28.5% higher than the same week the previous year, according to Realtor.com data.
“While affordability remains a significant challenge, buyers should encounter a more favorable market this spring with a greater number of homes for sale and more time to explore options and find the perfect fit,” explained Zillow’s senior economist, Kara Ng.
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Buyers are FHA-curious
The Mortgage Bankers Association reports that the recent increase in mortgage applications was largely driven by a surge in interest in FHA loans. These loans are backed by the Federal Housing Administration and require a down payment as low as 3.5%.
Most borrowers are mandated to pay mortgage insurance when purchasing a home with a down payment of less than 20%. A 20% down payment represents a significant amount, especially for first-time buyers. On a $400,000 property, a 20% down payment equates to $80,000.
There are two primary types of mortgage insurance: FHA, where the government insures the mortgage, and private mortgage insurance (PMI) for conventional loans. While FHA requires a minimum down payment of 3.5%, PMI allows for a down payment as low as 3%.
One key distinction between the two programs is that PMI premiums vary based on credit score. The lower the credit score, the higher the monthly PMI payments. On the flip side, FHA charges the same premium regardless of credit score.
Here’s how these differences play out: Borrowers with credit scores of 760 or higher typically pay less monthly for PMI, according to data from the Urban Institute. Conversely, borrowers with credit scores below 760 tend to pay less each month with FHA.
While this isn’t a hard and fast rule, FHA-insured loans generally have lower interest rates than conventional loans, which contributes to their lower cost. However, as credit scores decrease, FHA’s advantage over PMI becomes more pronounced. FHA is typically more economical for borrowers with credit scores below 720.