The following is a guest blog post:
The coronavirus has made a mess of the market. To say we’ve all been anxious while watching the Dow and its international counterparts may be the understatement of the decade. And of course, it’s prudent to reevaluate your investment portfolio in the harsh light of a market crash.
But not all markets have been affected in the same way. Take the mortgage industry, for example. The global pandemic has created waves in that sector that may surprise some investors.
You’ve probably been bombarded with media advertisements and email offers promising “record low rates” on first mortgages and refinancing. And indeed mortgage rates are astonishingly low right now. You may be tempted to look into how the sudden dip in mortgage rates can benefit you and we encourage you to do so. But before making any sudden moves, it makes sense to get a grasp of why we’re seeing this market trend and how you can best take advantage of it. In other words, take a look at the opportunity in the context of your overall financial strategy.
The Why Behind the Windfall
Mortgage rates are falling for two reasons: changes in the current yield on 10-year Treasury notes and the Federal Reserve Bank’s decision to lower the rate at which banks can borrow money.
Investors are skittish. Facing stock market losses larger than we’ve seen in a decade and hearing economists predict that financial recovery may be far off, many are turning to the security of long-term US government bonds. Increased demand has driven the price of T-notes up and their yield down. What does this have to do with mortgages? Mortgage lenders have a choice of where to invest their money, too. Right now, they can write very low-rate fixed mortgages and still see better ROI than they can expect from investing in expensive, low-yield T-notes. All mortgage lenders are coming up against this same reality. So the question becomes, which lenders are positioned to make up in volume what they can’t earn on price? Right now, competition is fierce as lenders try to attract more mortgage business by cutting their rates as far as they can. How low can they go? In order to make money, mortgage yields need only top the ten-year T-note yield which, as of this date, is under 1%.
So that’s how fixed mortgage rates fell so quickly. On the variable-rate side of the mortgage business, lenders are currently able to borrow money for short terms at a very low rate. That’s because the Federal Reserve Bank lowered its rate to near zero as an economic stabilization measure. The temporary lowering of the Fed rate means lenders can pass their savings along to real estate investors in the form of variable-rate mortgages. Variable-rate mortgages typically offer a steady rate for only three years, after which the mortgage rate is adjusted to reflect an updated economic outlook.
What Makes Real Estate So Attractive Now?
Low mortgage rates aside, it’s largely psychological. Real estate investments are perceived by many people as safer than other investment vehicles. There’s something reassuring about being able to point to an apartment building and say, “I own that.” There’s also a finite quantity of real estate while, theoretically, there’s an infinite amount of stock that can be created. That can be unnerving to some people. When the world is fighting a virus and the stakes are survival, every little shred of safety counts.
Buildings Have Windows and Walls
Low mortgage rates are just one piece of the current real estate puzzle. While property values have generally increased (slowly but steadily) over time, industry figures are averages. There are vast swaths of the US where property values have held steady or fallen. And no one knows precisely how the pandemic will affect real estate prices, particularly in some zip codes. That stunning high-rise condo in New York City may not be as attractive—or more accurately, seem as safe—as it was before New York became of the epicenter of the pandemic in the US.
Many investors find the cash flow potential attached to owning rental properties appealing. But with unemployment soaring, tenants all over the country are having trouble paying their rent. Rent strikes are on the horizon in some cities, as weeks of joblessness whittles away at so many workers’ financial security. Small business owners have also been forced to close and are struggling with having no revenue. Commercial rental property investments are not immune to the virus, either.
Resources and Relationships in Real Estate Investment
If you’re accustomed to remaining desk-side, making investment decisions based on what your read in economic journals and see in financial indexes, you might find there’s more legwork involved in real estate investing. Grab your calculator and get in your car. Real estate truly is predominantly about location. Work with a realtor who knows the neighborhoods you’re investigating by heart. Realtors perform a lot of critical research for you to earn their commissions, including comparable sales statistics that put sellers’ asking prices in their proper perspective.
Once you find a property you’re interested in, finding the best mortgage lender should be your next step. Even given today’s low mortgage rates, your choice of mortgage lender can mean the difference between a deal that looks good from the curb and one that looks good on actual paper.
Mortgage Lender Shapes and Sizes
When you’re shopping for a mortgage, you might start by talking with the bank you do business with on a daily basis—the place you keep your checking account, for example. Banks are inclined to do business with customers they’ve served in the past. It’s both human nature and smart business to build on the business relationships you already have. If you belong to a credit union, you may be at an even greater advantage. Credit unions’ first loyalty is to their members. They’re non-profit institutions so the rates they offer can be substantially lower than the rates offered by traditional banks. They can also be more flexible when it comes to qualifying for a mortgage. Some are more inclined to lend to members whose credit scores aren’t top tier.
If you’re trying to fast-track the process of getting a mortgage—and real estate negotiations do sometimes require you to act quickly—consider consulting a mortgage broker. Mortgage brokers streamline the process of finding a favorable mortgage by acting as the information conduit between you and multiple mortgage retailers. When you work with a mortgage broker, you need only gather the personal financial information required to apply for a mortgage (and there is a lot of it) once. Your broker can then shop the market for you and present you with a range of financing options.
Online lenders can also speed up the process of finding you a mortgage. For busy people, the ability to do business without face-to-face meetings and phone calls may be reason enough to shop for a mortgage online. Online lenders take some of the work and the wait out of the application process in other ways, too. That’s because they can gather the financial data that might take you days to pull together in just a few keystrokes. Online lenders also tend to get back to applicants with a thumbs up or down more promptly than traditional banks and brokers.
Researchers Earn Rewards
The financial pressures your facing it might make it hard to just sit still. And it makes sense to consider all of your options during a crisis. But speeding off in the wrong direction has led to many a wreck. It’s a good time to remember that education is empowering. A lot of us have a lot more time on our hands right now. Use yours to get smarter. That’s always a wise investment.
Susan Doktor is a journalist and business strategist who hails from New York City. She writes on a wide range of subjects, from real estate, finance, and technology to food and wine. Follow her on Twitter @branddoktor.