Mortgage Rate Forecasts for 2019 Predict Only a Slight Increase

A new round of mortgage rate forecasts for 2019 suggest that the average rate for a 30-year fixed home loan could hover within the 4.6% to 4.7% range next year. That’s only slightly higher than where we are right now, as of late summer 2018.

New Mortgage Rate Forecasts for 2019

Over the last month or so, three prominent housing organizations issued mortgage rate forecasts that look ahead into 2019. The groups included Freddie Mac and Fannie Mae — the two government-sponsored enterprises that buy loans from lenders — as well as the National Association of Home Builders (NAHB).

While their mortgage rate forecasts for 2019 varied slightly, it appears that all three groups expect to see some stability in terms of rate movements. Analysts with Fannie Mae and the NAHB don’t expect average rates to rise very much at all over the coming months. Freddie Mac’s team sees them rising gradually over the next year or so.

Did you know: There are many different types of home loans. But long-range forecasts are usually issued for the conventional 30-year fixed-rate mortgage, in particular. That’s because it is the most popular loan type among borrowers, by far.

Here’s a look at those three mortgage rate forecasts for 2019:

  • Fannie Mae’s latest forecast was published in July 2018. They predict that the average rate for a 30-year fixed mortgage will start 2019 at around 4.6% and stay within that range for much of the year.
  • The National Association of Home Builders also issued an updated forecast in July 2018. In it, they predicted that 30-year mortgage loan rates would average 4.71% in 2019. That’s basically in line with Fannie’s long-range outlook.
  • Freddie Mac’s new forecast, also published in July, calls for gradually rising rates over the next year or so. Their quarterly outlook predicted that 30-year loan rates would average 5.0% during the first quarter of 2019 and rise slightly throughout that year.

In July, Freddie Mac’s Economic and Housing Research Group issued the following statement:

“The 30-year fixed mortgage rate has been slightly declining since mid-June and was 4.53 percent in the second week of July. Rates have stepped back because of declining long-term Treasury yields, which continue to be pushed down by anxieties from a potential trade war. Our forecast has the 30-year fixed-rate mortgage averaging 4.6 percent this year, and rising to 5.1 percent next year.”

General Consensus: Big Jump in Rates Appears Unlikely

Granted, these are just forecasts. They are an educated guess based on current trends within the housing market, Wall Street, and the broader economy. So there’s a chance they could become inaccurate over time.

In fact, we’ve seen some inaccurate predictions in the past. At the end of 2016, some of these same groups were predicting that rates would rise steadily throughout 2017. But they actually dropped during the first half of that year and then hovered within a narrow range.

It’s the general consensus here that’s more noteworthy. And the consensus outlook seems to be that mortgage rates will remain relatively stable through the latter part of 2018 and into 2019. These analysts don’t expect to see a big jump in rates, or at least not a sustained hike.

Home Prices Still Rising in Most Cities

Based on these mortgage forecasts, home buyers might not need to worry about a big jump in mortgage rates any time soon. But rising home values are a very real concern.

House values in most U.S. cities are expected to rise gradually throughout 2019. This could reduce affordability and buying power for many people. So postponing a home purchase could mean that you’ll end up paying more.

In mid-August 2018, the real estate information company Zillow wrote the following:

“The median home value in the United States is $217,300. United States home values have gone up 8.3% over the past year and Zillow predicts they will rise 6.6% within the next year.”

Disclaimers: This article includes mortgage rate forecasts and housing predictions issued by third parties not associated with our company. We have presented them here as a service to our readers. As a general policy, the Home Buying Institute does not make projections or assertions about future housing trends.

Average Credit Score for Home Buyer Mortgage Loans: 2017 Update

The average credit score among home buyers using mortgage loans was 722 in April 2017, according to the latest data. But you don’t necessarily need a FICO score of 722 to qualify for a home loan. Read on to learn why.

In April 2017, home buyers who successfully closed on their mortgage loans had an average FICO credit score of 722. This is based on the latest “Origination Insight Report” published by Ellie Mae, a company that creates mortgage loan origination software.

Ellie Mae’s reports are based on data from a “robust sampling of closed loan applications.” This means they’re a pretty good indicator of what is happening across the mortgage industry.

In addition to identifying the average credit score for home buyer mortgage loans, the company’s reports show which types of loans are used most, average interest rates, loan-to-value ratios and more.

Average Credit Score Among Home Buyers: 722

In April, the average credit score among home buyers using mortgage loans was 722. The majority of purchase loans (70%) had scores over 700.

These numbers are based on the FICO scoring scale, in particular, which ranges from 300 to 850. Higher is better, when it comes to qualifying for a mortgage loan. Generally speaking, home buyers with higher scores have an easier time getting approved for financing, and tend to qualify for lower interest rates as well.

The 722 average credit score applied to all loans that were processed and closed using the company’s software solutions and network. Here are some additional breakouts for the three most popular loan types:

  • Conventional: The average FICO score for a conventional purchase loan was 753, during April 2017.
  • FHA: The average score for an FHA-insured purchase loan was 684.
  • VA: The average FICO number for a VA-guaranteed mortgage was 708.

You’ll notice a significant difference between FHA and conventional mortgage loans. The Federal Housing Administration program requires borrowers to have a minimum score of 580, in order to take advantage of the low 3.5% down payment option. Conventional loans (which are not insured by the government) often require higher scores.

FHA loans are generally easier to obtain, when compared to conventional mortgages. This may account for the wide gap between the average FICO credit scores shown above.

You Could Get By With Less

It bears repeating: The numbers shown above are just average credit scores for home buyer mortgage loans, based on the loan origination data collected by Ellie Mae. They do not represent the minimum scores required for the different mortgage programs.

Based on our conversations with lenders, it appears that most prefer to see a score of 600 or higher for loan approval. But that number is not set in stone. Mortgage underwriting and approval is a highly individualized process. It can vary from one borrower to the next.

Additionally, mortgage lenders tend to look at the big picture regarding applicant qualifications. Down payment size, credit history, income, and financial assets all play a role as well. So a relatively low credit score, by itself, might not be a deal-breaker.

Why Do Credit Scores Matter?

Why do mortgage lenders care so much about credit scores? In a word, risk.

Banks and lenders use these three-digit numbers to get a feel for how a person has borrowed and repaid money in the past. They also look at the credit reports that are used to produce those numbers.

Credit scores are just one part of a broader risk-assessment process. In general, a borrower with a higher number will be viewed as a lower risk (a “safer bet,” if you will) compared to someone with a lower score. Having a high number can make it easier to land a home loan in the first place, and could also affect the mortgage rate you receive from the lender.

As mentioned earlier, there is no single cutoff point used across the mortgage industry. Different lenders have different business models and appetites for risk. So the minimum credit score needed to buy a house can vary from one company to the next. It can also vary based on the type of loan you choose. This is why it’s important to shop around and compare your options.

Disclaimer: This article shows the average FICO credit scores for home buyers using FHA, VA and conventional mortgage loans, as of April 2017. These figures were reported by Ellie Mae. We encourage borrowers to understand the difference between average and minimum credit scores, and to get offers from more than one lender.

Mortgage Rate Forecast for April 2017 – 2018: A Slow Climb Ahead?

Home buyers got some good news last week, regarding mortgage rates. According to the weekly survey conducted by Freddie Mac, the average rate for a 30-year fixed mortgage loan dropped by 11 basis points (0.11%) last week, landing at 3.97%. That marked its lowest point of 2017, and the lowest level since November of last year.

But that’s just a short-term trend. The latest long-term forecast for mortgage rates suggests that they could inch upward between now and the end of 2017, bringing higher borrowing costs for home buyers who delay their purchases.

Revised Mortgage Rate Forecast for April 2017

On April 18, the Mortgage Bankers Association (MBA) published its latest mortgage rate forecast extending through the end of 2017 and into 2018. By their estimation, the average rate for a 30-year fixed mortgage (the most poplar type of home loan) will rise to 4.6% by the fourth quarter of 2017. Furthermore, they expect the benchmark 30-year rate to climb above the 5% threshold sometime around the middle of 2018.

As a result of this mortgage rate forecast, the industry group expects home refinancing activity to decline through the rest of 2017. Home purchases, meanwhile, will continue to dominate the mortgage market with more than twice as many loan originations, when compared to refinances.

Federal Reserve Tweaks Its Monetary Policy

The Federal Reserve has a part in all of this. After years of keeping the short-term federal funds rate near 0%, Fed officials are now raising it in small increments. This is the result of their improved outlook regarding the economy. After its last major policy meeting, which took place in March 2017, the Federal Open Market Committee stated:

“The Committee expects that … economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term … In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent.”

Additional rate hikes are possible, according to at least one source close to the matter.

The Federal Reserve does not control mortgage rates directly. The interest rates assigned to home loans are primarily driven by market forces. But the Fed’s policies can have an indirect effect on mortgage pricing, by shifting demand among investors. In short, when the Federal Reserve raises the short-term federal funds rate (which applies to inter-bank transfers), mortgage rates tend to go up as well.

This is partly what accounts for the MBA mortgage rate forecast, which calls for a gradual rise through 2017 and into 2018.

Bucking Predictions, Rates Have Dropped in Recent Weeks

Despite a previous increase for the federal funds rate, and additional hikes looming on the horizon, home mortgage rates have actually dropped in recent weeks. According to the nationwide industry survey conducted by Freddie Mac, mortgage rates have fallen steadily for the last five weeks are are currently 23 basis points (0.23%) lower than they were at the beginning of 2017.

The average for a 30-year fixed mortgage fell to 3.95% last week, down from 4.20% during the first week of this year. So they’ve defied predictions that were made at the end of last year.

This is something to keep in mind going forward. The MBA’s latest forecast for mortgage rates predicts a gradual increase through the rest of 2017 and into 2018. But they’ve been wrong with these predictions in the past.

Mortgage Rate Predictions for 2017 Have Been Revised Upward

The Mortgage Bankers Association (MBA), an industry group, recently increased its mortgage rate predictions and forecast for 2017. This was partly a response to the surge in mortgage rates that occurred during the last few weeks of 2016, and is shown in the chart below.

MBA analysts expect that the average rate for a 30-year fixed home loan will climb gradually throughout 2017, perhaps reaching 4.7% by year’s end. That’s up from a fourth-quarter projection of 4.4% in their previous forecast.

Note: At the time this story was published, on New Year’s Eve, 30-year mortgage rates were averaging 4.32% according to Freddie Mac.

Mortgage Chart Shows Rate Spike at End of 2016

Soon after the U.S. presidential election, mortgage rates in the U.S. began a steep upward climb that was still ongoing when this article was published. You can see this trend clearly in the chart below, which is based on the weekly market survey conducted by Freddie Mac.

PMMS Chart Dec. 29
Mortgage rate trends through December 29, 2016. Source: Freddie Mac PMMS.

This chart also shows why economists and analysts have revised their mortgage rate predictions for 2017. Many forecasts were built on the assumption that 30-year rates would start the new year somewhere between 3.5% and 3.75%, which is where they were a couple of months ago. But they’ve now surged well past that range and have crossed into 4% territory, requiring a new set of mortgage rate forecasts for 2017.

Here are the average rates as of December 31, 2016:

  • 30-year fixed mortgage: 4.32%
  • 15-year fixed: 3.55%
  • 5/1-year adjustable (ARM): 3.30%

So that’s where we are right now. Looking forward, here are some mortgage rate predictions for 2017.

MBA’s Mortgage Rate Forecast for 2017

As mentioned earlier, analysts with the MBA expect that home loan rates will rise gradually during 2017. They are not predicting a huge spike like the one we saw over the last few weeks (see chart above), but rather a gradual upward trend.

Here are the Mortgage Bankers Association’s quarterly predictions for average 30-year loan rates.

  • Q1 2017: 4.3%
  • Q2 2017: 4.4%
  • Q3 2017: 4.6%
  • Q4 2017: 4.7%

So during the first quarter of the new year, they expect 30-year mortgage rates to average 4.3%. That’s where we are right now, at the end of December 2016, which means they expect some rate stability over the coming weeks.

Going forward, the industry group forecasts a steady but gradual rise in mortgage rates throughout 2017.

Of course, these are just predictions. No one can predict future interest rate trends with complete accuracy. In fact, at the end of 2015, MBA’s analysts predicted that rates would rise steadily throughout 2016, and that did not happen (though we did see a spike during the last nine weeks of the year).

The point is, you have to take these mortgage rate forecasts with a grain of salt. They are an educated guess based on current conditions, and nothing more.

A Different Outlook from Freddie Mac?

The economists at Freddie Mac — the government-controlled corporation that buys and sells mortgage loans — seem to have a slightly different view for 2017.

In December 2016, their economic and housing research team issued some predictions for mortgage rates. Based on their quarterly forecast, they expect the average rate for a 30-year loan to hover around 4.2% throughout 2017. Though they did say that “Interest rates will gradually rise as the Federal Reserve continues on its path of policy normalization.”

Again, predictions are a tricky business, especially with the kind of volatility we’ve seen lately. The one thing we can say with certainty is that borrowers will encounter higher mortgage rates at the start of 2017 than at the beginning of 2016. The chart above is evidence of this.

Disclaimer: This story contains mortgage rate predictions and forecasts for 2017. Such statements were provided by third parties not associated with our company. As a general rule, the Home Buying Institute (HBI) makes no claims or assertions about future trends within the housing industry.

2016 Mortgage Rate Chart Shows Big Surge

On Thursday, December 15, Freddie Mac reported that mortgage rates rose again in their latest industry survey. But that’s just the tip of the iceberg. As shown in the 2016 mortgage rate chart below, home loan rates in three categories have risen for the last seven weeks in a row and are now at their highest point of the year.

If that weren’t enough to light a fire under would-be home buyers, the Federal Reserve recently announced that it would increase the short-term federal funds rate for only the second time in a decade. Indirectly, this could lead to even higher lending rates in 2017. Borrower beware.

Mortgage Rate Chart Shows Late 2016 Surge

Freddie Mac published the 2016 mortgage rate chart shown below earlier today, along with the results of their latest weekly survey of the mortgage industry.

mortgage rate chart 2016
Mortgage rate chart for 2016. Source: Freddie Mac PMMS

If a picture is worth a thousand words, then this chart speaks volumes. A couple of things will jump out at you right away. The first is the large spike in mortgage rates, shown on the right side of the chart. That surge took place over a six-week period that began in mid-November. You’ll also notice that rates are higher today than they were at the start of 2016.

Mortgage rate chart fast facts:

  • The average rate for a 30-year fixed mortgage loan rose three basis points (0.03%) this week to land at 4.16%. That’s the highest it has been since October 2014.
  • It bears repeating: 30-year mortgage rates haven’t been this high in over two years.
  • The average rate for a 15-year fixed home loan rose to 3.37% this week. It is also at its highest point of the year.
  • Borrowers paid an average of 0.5 points (a.k.a. discount points) in order to secure these rates. This is a common strategy used to reduce total borrowing costs over time.

Not surprisingly, the Mortgage Bankers Association reported a drop in home loan applications yesterday. According to their data, total application volume declined by 4% (on a seasonally adjusted basis) last week from the previous week. Clearly, this “new normal” for mortgage rates is pricing some buyers out of the market, and closing the window of savings for homeowners who are trying to refinance.

As we enter 2017, the mortgage industry will have to adjust to the effects of rising rates shown in the chart above.

Rising Home Prices Add to the Urgency

Surely, home buyers are feeling a sense of urgency right about now. The recent surge in mortgage rates has caught everyone’s attention, lenders and borrowers alike. But that’s not the only concern for buyers. Rising home values are creating a “double whammy” situation by further reducing affordability.

In most cities across the country, home prices rose steadily over the last year. And they’re expected to rise further in 2017, though possibly at a slower pace. According to the real estate data company Zillow, home prices nationwide rose by 6.2% during 2016. Looking forward, the company’s economists expect house values to rise by around 3% in 2017.

The message to home buyers is clear: You might want to think about buying sooner, rather than later.

Disclaimer: This story includes a 2016 mortgage rate chart provided by Freddie Mac. This chart shows averages based on a survey of about 125 lenders across the country. Individual loan rates vary based on a variety of factors, including borrower credit scores, the type of loan being used, etc.

Analysts Predict Mortgage Rates Will Rise in 2017, but Gradually

We’re halfway through October, with the end of the year right around the corner. That means a lot of would-be home buyers are looking ahead to 2017. And many of them have the same question: Will mortgage rates rise during 2017, and if so by how much?

Unfortunately, nobody can predict future mortgage-rate trends with complete accuracy. But that doesn’t stop economists and housing analysts from making predictions. The general consensus among many industry-watchers is that mortgage rates will rise in 2017, but gradually.

Rising Mortgage Rates in 2017?

Reuters recently published the results of a survey of mortgage industry analysts. According to the survey respondents, the average rate for a 30-year fixed mortgage loan is expected to rise gradually in 2017. Thirty-year rates are currently hovering just below 3.5%, according to the latest Freddie Mac market survey published last week. They are expected to climb to an average of 4.08% in 2017, and 4.60% in 2018.

“The tighter U.S. labor market will lead to stronger wage income growth over the coming year. Combined with still-low mortgage rates, income growth will lead to stronger purchase demand,” said Andres Carbacho-Burgos, an analyst for Moody’s Analytics.

So, what factors might lead to rising mortgage rates in 2017? The Federal Reserve’s monetary policy plays a role. Fed officials will meet on November 1, 2016, for one of their regularly scheduled policy discussions. They’ll meet again at the end of December. Many analysts believe the Fed will raise the short-term federal funds rate after their December meeting.

The funds rate is used by banks when transferring money among themselves. While it doesn’t affect mortgage rates directly, it can have an indirect influence by shifting investor demand. In short, when the federal funds rate goes up, mortgage interest rates tend to rise as well. And a growing chorus of voices is predicting this exact scenario as we move into 2017.

MBA Also Expects Rising Rates

A recent forecast from the Mortgage Bankers Association (MBA) also predicted a gradual rise in home loan rates during 2017. Economists at the MBA anticipate that the average rate for a 30-year mortgage loan will rise to 3.7% by the end of this year, and continue inching upward throughout 2017.

Here is their latest forecast for 30-year home loans, issued in September:

  • Q1 2017: 3.9%
  • Q2 2017: 4.1%
  • Q3 2017: 4.3%
  • Q4 2017: 4.4%

But let’s not forget that the MBA made a similar forecast at the end of last year, which didn’t pan out. In December 2015, they predicted that the average rate for a 30-year fixed home loan would rise to 4.8% by the end of 2016. But that doesn’t seem likely, since the current average is around 3.47% (according to Freddie Mac). So you have to view these mortgage rate forecasts for what they are — an educated guess.

The key takeaway here is that most analysts and economists expect mortgage rates to rise gradually, and slightly, during 2017. As a result, home buyers who postpone their purchases until later next year might end up paying more interest on their loans. It’s just another point to consider when laying out your home-buying plans.

Disclaimer: This article contains forward-looking statements from third parties not associated with the Home Buying Institute. We make no claims or assertions about mortgage trends in 2017.

Wells Fargo 3% Down Payment Mortgage Gives FHA Run for Its Money

Not to be outdone by its competitor Bank of America, which announced a 3% down payment mortgage program earlier this year, Wells Fargo recently stated that it too would offer fixed-rate mortgages for first-time buyers with down payments as low as 3%.

This is significant for two reasons: (1) Wells Fargo is the largest mortgage lender in the United States, by volume. So this new program could be extended to a significant number of home buyers nationwide. (2) The 3% down payment falls below the FHA’s minimum requirement of 3.5%.

The fact that this program undercuts FHA is not a matter of chance or coincidence. Bank of America, Wells Fargo, and other lenders with similar offerings are essentially luring business away from the Federal Housing Administration. They’re doing this by offering an attractive and potentially cheaper alternative to the government-insured FHA loans.

The Wells Fargo 3% down payment mortgage has a nifty name too. They call it yourFirst MortgageSM (the italics are theirs). From here on out, I’ll refer to it as “the loan program” for simplicity.

Wells Fargo 3% Down Payment Mortgage

So what does this sexy new loan program offer for qualified first-time home buyers? Here are the specific features and requirements, adapted from a May 26 news release:

Smaller down payment means less money out of pocket.
Borrowers who qualify for the program could obtain a conventional (non-FHA) fixed-rate mortgage loan with a down payment as low as 3%. But borrowers don’t necessarily have to pay it out of their own pockets. According to the Wells Fargo program announcement, the down payment and closing costs “can come from gifts and down payment assistance programs.”

Educational incentives give home buyers a reason to learn.
Wells Fargo wants first-time home buyers to make smart, well-informed decisions about their purchases. To that end, they are offering an education-based incentive. Customers who complete an approved home buyer education course could earn a 1/8-percent interest rate reduction on their loans. The course must be provided by a HUD-approved counselor.

Broader credit and income requirements mean less hurdles for borrowers.
The Wells Fargo 3% down payment program also features “expanded credit criteria.” This means first-time home buyers with limited credit histories (that might have disqualified them in the past) could still qualify for the loan. The company will expand its credit history requirements to include “nontraditional sources, like tuition, rent, or utility bill payments.” Additionally, Wells Fargo said it will consider the income of others who will live in the home, such as family members or renters.

Borrowers must be able to repay the loan, with documents to prove it.
In keeping with the federal government’s fairly new (and sensible) Ability-to-Repay rule, first-time home buyers who use the Wells Fargo 3% down payment mortgage program must be able to demonstrate their ability to repay the debt. This is typically done with bank statements, pay stubs, and other documents that show income and assets. Additionally, the loan must be “fully documented and underwritten,” according to Wells Fargo.

Fewer Barriers for First-Time Home Buyers

These are noteworthy changes to the company’s lending policy, and they could affect a large number of first-time home buyers who otherwise might not qualify for a mortgage loan. The 3% down payment program reduces the upfront expenses associated with a home loan, and it offers broader qualification criteria to bring more borrowers into the program.

According to Brad Blackwell, Executive Vice President of Wells Fargo Home Lending:

“[W]e wanted to provide access to credit and simplify the experience while maintaining responsible lending practices. We partnered with credit experts such as Fannie Mae and Self-Help, an affiliate of the Center for Responsible Lending, to develop an easy-to-understand affordable loan option that gives homebuyers the best offering in the market.”

Trend Watch: Conventional Mortgage Loans With 3% Down Payment

In the years following the housing crisis, there weren’t very many lenders offering conventional mortgage loans with 3% down payments. But that has changed. Today, an increasing number of lenders are peddling loans with down payments as low as 3%.

This is largely the result of recent changes within the secondary mortgage market. Fannie Mae and Freddie Mac will now purchase conventional mortgages with loan-to-value ratios as high as 97%. Conversely, that means the home buyer / borrower can make a down payment as low as 3% on such a loan.

Conventional Mortgages With 3% Down: Two New Programs

Toward the end of 2015, Freddie Mac (one of the two “government-sponsored enterprises,” or GSEs, that buy and sell mortgage loans) announced it would begin purchasing conventional mortgage products with a loan-to-value ratio up to 97%. In the past, it was rare for the company to acquire such loans.

This is a major shift since Freddie Mac’s guidelines tend to “trickle down” to the primary mortgage market in general. Lenders tend to originate mortgage loans that fall within the purchasing parameters of Freddie Mac and/or Fannie Mae, so that they can turn around and sell their loans to the GSEs.

According to a company bulletin that announced the change, Freddie Mac is broadening its parameters in order to “help expand access to mortgage credit.” That’s mighty benevolent of them. But it doesn’t hurt that they’ll be making a lot more money this way, by expanding their asset pool.

The Freddie Mac product is called Home Possible Advantage. It will be available for home loans with settlement dates on or after March 23, 2016. Borrowers who use this program could qualify for a conventional mortgage loan with a 3% down payment. Manually underwritten borrowers need to have a credit score of 660 or higher and participate in a homeowner education program. Additionally, the borrower’s “annual qualifying income must not exceed 100% of the area median income or the income multipliers in the designated high-cost areas.”

Not to be outdone by (or to lose business to) its GSE counterpart, Fannie Mae also announced it will acquire conventional mortgage loans with down payments of 3%. In a product fact sheet published in November of last year, Fannie Mae outlined the requirements for 97% LTV mortgages. Many of the high-LTV loans the GSE purchases will fall under its HomeReadyTM product umbrella. The requirements for HomeReady include income limits similar to Freddie Mac’s parameters, as well as homeowner education and counseling.

As a result of these ongoing changes within the mortgage market, we expect to see expanded opportunities for borrowers seeking a conventional home loan with a 3% down payment. Just realize that most of these loans require additional insurance, and the cost of this insurance is borne by the borrower. So let’s talk about that next.

PMI Is Required in Most Cases, Unless…

Borrowers seeking a low-down-payment home loan must consider the added cost of mortgage insurance. If you make a down payment of 3% on a conventional home loan, there’s a good chance you will have to pay for private mortgage insurance, or PMI. This insurance protects the lender who makes the loan, but it is paid for by the borrower. Thus, PMI can increase the size of a borrower’s monthly payments.

The Freddie Mac and Fannie Mae 97% LTV products mentioned above require some level of PMI. (You’ll find those insurance requirements in the fact sheet and bulletin hyperlinked above.)

Generally speaking, a loan-to-value ratio above 80% requires PMI. This means that most borrowers who take out a conventional mortgage loan with a 3% down payment will end up paying PMI — at least in most cases. But there are a few programs out there that allow home buyers to sidestep the added cost of PMI, even with a down payment as low as 3%.

We have previously reported on such programs, including some offered by credit unions. But even the “big banks” are getting in on the game. Bank of America is the most recent (and newsworthy) entrant into the 3% down payment market. The company recently positioned itself as an attractive alternative to FHA financing by offering a 3% down payment without PMI, for qualified borrowers. A credit score of 680 or higher is required, according to the company.

According to American Banker magazine, Bank of American will turn around and “sell the loans and servicing rights to Self-Help Federal Credit Union, a Durham, N.C., community development lender…”

The bottom line is that home buyers seeking a conventional mortgage with a 3% down payment have a lot more options these days. And some are available without PMI. This is certainly a trend we will be monitoring in 2016, as it could affect a large number of home buyers.

Chart: Mortgage Rates Have Dropped Steadily Since 2016 Began

At the end of 2015, we reported that many economists and housing analysts were predicting a gradual rise in mortgage rates during 2016. This was partly because of the Federal Reserve’s decision to raise the short-term federal funds rate, after holding it near zero for years (along with other factors).

But so far in 2016, mortgage rates have been dropping steadily. For instance, the average rate for a 30-year fixed mortgage has either dropped or remained unchanged every week since the beginning of the year. You can see this trend clearly in the mortgage rate chart below, obtained courtesy of Freddie Mac.

This downward trend contradicts the “conventional wisdom” we reported a few months ago, and it’s good news for anyone who is in the market to buy or refinance a home.

Here’s an updated look at mortgage rates in 2016, including the drops we’ve seen in recent weeks:

Chart: Watch Mortgage Rates Drop in 2016

The chart below accompanied Freddie Mac’s latest weekly survey of the primary mortgage market, published earlier today. On the right (and more recent) side of the chart, you’ll see the downward trend mentioned above. If you were to draw a vertical line upward from the December 31 marker, you’d end up with a nice down slope to the right of that line.

PMMS chart Feb 25
Freddie Mac’s mortgage survey chart, as of February 25, 2016

The average rates assigned to other mortgage products — including the 15-year fixed mortgage and the 5/1 ARM — have followed this downward trend as well. We have now hit a one-year low point in the 30-year fixed category.

It’s Official: 30-Year Rates Fall to a 12-Month Low

The average rate assigned to a 30-year fixed mortgage (FRM) has dropped by 39 basis points, or 0.39%, since the start of 2016. When 2015 came to a close, the average rate for a 30-year loan was 4.01%. As of the latest rate survey taken this week, that average had fallen to 3.62%. That’s the lowest it has been since early February of last year.

It bears repeating: today’s 30-year mortgage rate average has dropped to a 12-month low.

This should come as welcome news to home buyers in the market to purchase a house, and homeowners looking to refinance. Declining rates will improve housing affordability for buyers, and lessen the blow of rising home prices. Dropping mortgage rates will also put more homeowners in a position to refinance their existing loans and save money over the long term.

Other Loan Products Are More Affordable as Well

The 15-year mortgage rates average has also dropped steadily since the start of 2016. During the first week of this year, the 15-year average was 3.26%, according to Freddie Mac’s weekly survey. This week it fell to 2.93% — its lowest level since April of last year.

The average rate for a 5-year adjustable-rate mortgage (ARM) also dropped this week, landing at 2.79%.

Perhaps those upward predictions will eventually pan out. Perhaps we will end 2016 with rates being higher than they were at the end of last year. But right now, it’s just not happening. So much for forecasts.

Disclaimer: This story mentions forecasts and predictions offered by third parties not associated with the Home Buying Institute. The publishers of this website make no claims or guarantees about future interest rates or trends within the mortgage market.

FHA Alternative: Bank of America’s 3% Down Payment Mortgage Loan

Cash-strapped home buyers rejoice.

Bank of America, one of the largest mortgage lenders in the U.S. based on loan volume, recently announced it would offer a 3% down payment home loan without charging borrowers for private mortgage insurance. It’s a safe bet this product will be wildly popular with borrowers.

For many years, home buyers who wanted a mortgage loan with a down payment in the 3% range had but one option — an FHA loan. Mortgages insured by the Federal Housing Administration offer loan-to-value ratios up to 96.5%, for a out-of-pocket down payment as low as 3.5%.

But over the last couple of years, an increasing number of mortgage lenders have been offering 3% down payments on conventional (non-government-backed) home loans. We’ve written about this trend several times in the past.

Now, Bank of America appears to be jumping on the 3% bandwagon as well, according to a recent article in the Wall Street Journal.

Bank of America Offers 3% Down Payment with No PMI

Bank of America is the latest — and one of the largest — U.S. lenders that is now offering 3% down payment mortgage loans, according to a recent company announcement. The new financing product, which will be officially announced later today, allows Bank of America to compete with the FHA for home buyers seeking a lower down payment option.

But that’s not all. The Charlotte-based financial company said that their 3% down payment product will also allow home buyers to avoid private mortgage insurance (PMI). This is a noteworthy feature, because PMI is typically required on home loans that account for more than 80% of the purchase price.

Typically, when a borrower makes a down payment in the 3% range, he or she would have to pay for additional mortgage insurance that is designed to protects the lender. These insurance policies inflate the monthly payments and the total cost of the loan.

TD Bank was one of the first to offer such a product (a 3% down payment with no PMI), when it retooled its “Right Step” mortgage program back in 2014. Since then, other lenders have followed suit.

An Attractive Alternative to FHA Loans?

According to the Department of Housing and Urban Development (HUD), the smallest allowable down payment on an FHA loan is 3.5%. FHA also requires two types of mortgage insurance — there’s an upfront premium, as well as an annual premium. This is one of the biggest downsides to the program, especially since the annual premium has to be paid for the life of the loan in most cases.

The upfront mortgage insurance premium (MIP) for an FHA-insured home loan is currently 1.75% of the amount being borrowed. That’s $3,500 on a $200,000 mortgage, for example. The annual MIP for a 30-year fixed FHA loan is 0.85%.

So if Bank of America offers a 3% down payment option to home buyers, without the added cost of PMI, they will position themselves as an attractive alternative to FHA loans for cash-strapped borrowers.

According to D. Steve Boland, managing director for consumer lending at Bank of America, the company’s new loan product gives eligible borrowers a much-needed alternative to the Federal Housing Administration’s program:

“We need an alternative in the marketplace that helps creditworthy borrowers with a track record of paying debts on time,” he said. “We think there are still a lot of uncertainties out there in working with FHA.”

But not everyone will qualify for the new lending product. According to the company, borrowers must have a credit score of 680 or higher. There are size limits on the loan as well.