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Where are mortgage rates heading?

The Federal Reserve is driving mortgage rates lower and anchoring Treasury rates through its policy of asset purchases, or what’s known as quantitative easing. It may be hard to believe, but mortgage rates have more room to fall as they closely track the 10-year Treasury yield. The current spread of 220 basis points is well above the average spread of 170 basis points we saw prior to the coronavirus pandemic. Since the Fed announced its decision to purchase unlimited mortgage-backed securities in March, the spread in rates has narrowed by 50 basis points, resulting in the record lows we’re seeing now.

It’s entirely possible we’ll see average 30-year mortgage rates drop to 2.70% by the end of the year if the spread continues to narrow at the same pace. Rates could even hit 2.30% in 2021, especially if Treasury rates remain close to their current levels. For homeowners who have yet to refinance, this presents a great opportunity to take advantage of lower rates and potentially reap substantial savings on interest payments.

How does a mortgage refinance work?

Mortgage Citizen Study: Cities Where Mortgage Refinance Borrowers Saved the Most by Shopping Around - Q3 2020

Since the start of the COVID-19 pandemic earlier this year, mortgage rates have remained near record lows. This trend has created an opportunity for homeowners to refinance their mortgages and potentially save a significant amount of money.

To help consumers understand how much they might save, Mortgage Citizen created its Mortgage Rate Competition Index. It measures the basis-point spread between high and low annual percentage rates, or APRs, offered to users on the Mortgage Citizen platform through the third quarter of 2020.

On average, Mortgage Citizen found that in 50 of the nation’s largest cities refinancing could save homeowners an average of more than $44,000 over the life of their loan. That could translate to nearly $35,000 in Columbus, Ohio, or more than $59,000 in Oklahoma City.

Key Findings

Comparing refinance offers can yield big savings for borrowers in some of the nation’s largest cities. Refinance borrowers can save the most in Oklahoma City ($59,255), Minneapolis ($50,875) and San Francisco ($50,730).

Oklahoma City, Harrisburg, Pa. and Minneapolis are the cities where refinance borrowers see the largest spread in APRs when they shop around. The average index in these three areas is 1.02. This spread yields average lifetime interest savings of $50,772.

Even in cities where savings aren’t as robust as they are in Oklahoma City or Minneapolis, significant savings are still possible. For example, in Columbus, Ohio, where potential savings are the lowest, refinance borrowers can still save $34,786 over the life of their loan by shopping around.

Cutting back the total interest paid over a loan’s lifetime can translate into meaningful savings on a monthly and annual basis. For example, refinance borrowers across the country can save an average of about $124 a month, or $1,487 each year.

What the index means for you

Let’s say a borrower is offered two loans on the Mortgage Citizen platform – one with an APR of 4% and another with an APR of 3.5% – the spread would be 0.5%, or 50 basis points. The wider the index, the more a potential buyer can save by shopping around with multiple lenders.

For this report, we used the index to analyze the difference in rates and potential savings for mortgage refinance borrowers in 50 of the largest cities in the United States. By using Mortgage Citizen to shop around before refinancing, a borrower could potentially save an average of nearly $44,000 over the life of their loan.

What is the Mortgage Rate Competition Index?

The Mortgage Citizen Mortgage Rate Competition Index is a proprietary measure of the dispersion in mortgage pricing. It measures the APR spread of the best offers available on Mortgage Citizen relative to the least competitive (i.e., the highest) rates on 30-year, fixed-rate mortgages. Our research shows that mortgage rate competition varies with the financial and operational measures of activity in the mortgage markets.

A mortgage shopper enters their information on Mortgage Citizen.com. They input loan variables, including the proposed amount and down payment, and property variables, including property type and location. Using our proprietary algorithm, Mortgage Citizen matches borrowers with lenders based on the criteria they provide. Interested lenders return a rate and fee offer.

The spread is the difference between the highest and lowest offers. In this example, 4.62-4.21 = 0.41. We repeat this calculation across 30-year, fixed-rate loans and then find the median of the individual spread, which is our index value. This is done separately for the population of purchase and refinance loan requests. For the purposes of this study, we used data on the combined statistical area (CSA) or metropolitan statistical area (MSA) levels to approximate data on a city level.

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