If you’re playing the waiting game with mortgage rates, you may not want to wait much longer.
A new study from Haus, the home-finance startup created by Uber
co-founder Garrett Camp, examined what role seasonality, loan size, credit scores and other factors play in the mortgage rates that lenders offer borrowers.
The study found that much like the housing market itself the mortgage market ebbs and flows with the seasons. And January, as it turns out, is the best time of year to get a new home loan on average.
In January, lenders offer a discount of nearly 20 basis
points compared to the time period between June and October when rates are
typically the highest for the year. The cooler weather, in general, brings out
lower mortgage rates, with December and February being the next-cheapest months
based on the Haus study.
“While we can’t say for exact certainty why rates are lower in January than in the summer months, we can speculate that competition for customers matter,” Ralph McLaughlin, chief economist and senior vice president of analytics at Haus, said in the report.
“Since home buying and refinancing is seasonal, there is less mortgage origination in winter months, so it could be that lenders must lower their rates to stay competitive and attract business,” he added.
To produce the report, Haus analyzed loan data from Freddie
Mac for more than 8.5 million mortgages originated between 2012 and 2018. When
examining for seasonality in mortgage rates, the company controlled for other
characteristics, including the borrowers, size of the loan and the property.
Nowadays, scoring the lowest rate possible can be akin to finding a needle in a haystack, McLaughlin noted. Although mortgage rates have risen from the record low set right before the New Year, they remain extremely low by historical standards. However, economists have warned that as the year goes on rates could rise, depending on the trajectory of the pandemic and the related economic recovery.
But the timing of when a prospective borrower applies for a
new mortgage is just one factor that can save them money. The size of the loan
is another consideration. Loans with balances between $350,000 and $450,000
typically fetch a 23-basis-point discount on the mortgage rate compared to
mortgages under $100,000, Haus found.
The savings is actually a reflection of the cost for the
lender to originate a loan. “The cost of paying someone to originate a loan is
the same for a $500,000 mortgage as it is for a $100,000 mortgage, but the
latter provides less of a return to the mortgage originator than the former,”
McLaughlin said. “In order to help cover this fixed cost, lenders likely
increase their rates for lower balance mortgages to compensate.”
Of course, borrowers can only control so much when it comes
to the timing of when they apply for a loan or how large the loan is —
especially if they are using it to buy a new home. As the study stresses, other
factors can have an effect on the rate that’s offered. People with credit scores
above 800, for instance, will receive mortgages with rates that are 42 basis
points lower on average than borrowers with a score below 650.
And perhaps the easiest way to save money is by shopping
around. Haus found that there was a difference of 75 basis points between the
most and least expensive large mortgage lenders across the U.S. “This means
that, all else equal, the same borrower would get a 5% rate with the most
expensive lender and a 4.25% rate with the least expensive lender,” McLaughlin said.