Potential borrowers became “more sensitive” to mortgage rate changes after the recession, suggesting that the Federal Reserve’s lower interest rates helped spur recovery, according to a new working paper from the Joint Center for Housing Studies of Harvard University.
A 25 basis-point drop in interest rates improves the likelihood that a potential borrower will pursue a loan by half, according to the report. Per month, that has the potential to raise mortgage originations from roughly 100 for every 100,000 borrowers to 140 for the same group.
However, loan-level price adjustments — risk-based fees paid by lenders to Fannie Mae or Freddie Mac — are typically passed on to buyers, the report found. Cutoffs for LLPAs mean a one-point difference in credit score could impact borrowers while lenders receive the same rate. This explains the drop in mortgage demand among low-income, low-credit borrowers following the recession.
After several years of historical lows, mortgage rates have begun to tick upward and are expected to reach 4.75% by the end of the year. So far, the impact on homebuying has been minimal. According to a Zillow survey, housing activity won’t slow dramatically until rates reach 5.5%.
Rising rates may have a positive impact on the market, however, including motivating buyers to act before rates hiker further and incentivizing looser lending standards.
Still, even small increases will impact the likelihood of first-time homebuyers entering the market. A 0.5% rate increase can add $28 to monthly mortgage payments for every $100,000 owed on the home, according to SmartAsset.
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