It was a well-timed week for mortgage rates to stabilize: The 30-year mortgage averaged 6.77% in the week ending March 27, down three basis points from the previous week. A basis point is one one-hundredth of a percentage point.
A three-basis-point decline sounds kind of measly, but it stopped a two-week streak of rising rates. And the slight downturn happened in the middle of spring break season. Just in time.
The dates of spring break vary across the country, and there aren’t readily available statistics on its effect in local housing markets. But anecdotally, a real estate agent will tell you that would-be home buyers stampede into the market during and immediately after spring break.
So if your home search is beginning in earnest, you’re in plenty of company. In fact, the number of purchase mortgage applications is up 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,” MBA president and CEO Bob Broeksmit said in a news release.
Conveniently, the increase in demand is met by a growing supply. More people are listing their homes for sale, and houses are staying on the market longer. Through March 15, the number of active real estate listings nationwide was 28.5% higher than the same week a year before, according to data compiled by Realtor.com.
“While affordability is still a big challenge, buyers should find a friendlier market this spring with more homes for sale and more time to consider options and find the right fit,” said Kara Ng, a senior economist for Zillow.
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Buyers are FHA-curious
According to the MBA, last week’s rise in mortgage applications was driven by a surge in interest in FHA loans. These mortgages are insured by the Federal Housing Administration and require a down payment as low as 3.5%.
Most borrowers are required to pay mortgage insurance when buying a house with a down payment of less than 20%. A 20% down payment represents a big chunk of change, especially for first-time buyers. On a $400,000 home, a 20% down payment equals $80,000.
There are two main types of mortgage insurance. One is the FHA, in which the government insures the mortgage. The other is private mortgage insurance, or PMI, for conventional loans. Whereas the FHA requires a down payment of at least 3.5%, you can make a down payment as small as 3% for a loan with PMI.
A key difference between the two programs is that PMI premiums vary according to credit score. The lower the credit score, the more you pay each month for PMI. The FHA, on the other hand, charges the same premium regardless of credit score.
Here’s how these differences shake out: PMI tends to cost less every month for borrowers with credit scores of 760 or higher, according to data collected by the Urban Institute. The FHA tends to cost less every month for borrowers with credit scores below 760.
This isn’t an airtight rule. Interest rates on FHA-insured loans tend to be lower than on conventional loans, and that’s part of the reason FHA loans often cost less. But FHA’s edge over PMI gets bigger the further you descend the ladder of credit scores. FHA is almost always cheaper for borrowers with credit scores lower than 720.
