2.5% mortgage rates are here. What’s next — 2%? Or even 1%?

Rates in the 2s are now reality

Mortgage rates in the 2s are here. And we’re not talking about a one-time instance of 2.99%, either.

We’re talking about real, 30-year, fixed-rate mortgages starting at 2.5% from multiple lenders.

Of course, not everyone will find rates so low. As always, your mortgage rate depends on the strength of your application and which lenders you shop with.

For those with strong credit and a willingness to shop around, however, rates in the 2s could be a real possibility.

Mortgage rates are dropping

Freddie Mac just announced that mortgage rates averaged 3.28% for the week of May 14th.

Since the Freddie Mac figure is an average, no doubt some borrowers paid more, and some paid less. Potentially a lot less.

On May 14th, our daily rate survey showed that rates for 30-year, fixed rates for FHA and VA loans were priced at 2.75%.

A quick poll on Facebook’s RealTown page resulted in several real estate professionals who reported mortgage rates in the 2.8% range. One was even at 2.5%.

The best borrowers — ones with high credit scores, little debt, solid equity, and a willingness to shop around — are scoring impressive deals.

That’s a lot less than the 3.28% national average listed at the same time by Freddie Mac.

The RealTown responses show that the very best borrowers — the ones with high credit scores, little debt, solid equity, and a willingness to shop around — are scoring impressive deals.

More importantly, today’s 2% borrowers are financial pioneers, people marching into a new mortgage environment where more are likely to follow.

Real mortgage rates at 2.5%

One specific loan heralded the entrance of low-2s mortgage rates into the marketplace.

The 2.5% “Conquest” loan program has just been announced by United Wholesale Mortgage (UWM), a firm based in Pontiac, MI.

This is a very big deal for two reasons. First, we’re talking about fixed-rate, 30-year, mortgages at 2.5%.

Second, UWM is a huge player in the mortgage universe. It was actually the third-biggest residential mortgage lender in 2018, after Quicken Loans and Wells Fargo.

The difference is, UWM is a wholesale lender. It does not deal directly with the public but instead offers loan products through mortgage brokers. That’s probably why you haven’t heard of it.

For 2019, UWM reported $107.7 billion in mortgage loan volume, a figure it says is the wholesale volume record.

In other words, there’s a real possibility that borrowers working with mortgage brokers in the near future could have access to those 2.5% rates. They’re not just a one-time thing.

The marketplace impact of lower rates

The real importance of UWM’s Conquest loan is that it sets a new bar for mortgage rates across the industry.

According to company President and CEO Mat Ishbia, the firm “is directing 10,000+ borrowers back to brokers every single day.”

“Some people said we’d never see interest rates drop below 3 percent on a 30-year mortgage, but it’s now available when borrowers work with an independent mortgage broker,” said Ishbia.

The real importance of United Wholesale Mortgage’s 2.5% rate is that is sets a new bar across the industry.

“We believe that the housing market is going to be strong and we want to do our part to help more people get into their dream homes as we get through this pandemic together as a nation.”

Spurred on by competition, it’s likely many other lenders will follow suit. We may not see 2.5% rates across the board. At least, not immediately.

But as of May 15 — only a day after UWM announced 2.5% rates — Chase Bank was offering 30-year mortgage rates as low as 2.875% (2.944% APR). And Wells Fargo was not far behind, at 3.125% (3.246% APR).

But these rates were only for purchase transactions. Refinance rates were between 3.5% and 4%. UWM is offering rates in the 2s for both purchase and refinance loans.

Even so, it seems the push for widespread lower mortgage rates has already begun.

Mortgage rates are especially good for home buyers

Interestingly, today’s low mortgage rates seem to tip in favor of home buyers rather than refinancers.

Take a look at this one-day snapshot, comparing advertised purchase versus refinance rates from major lenders on May 15*:

*Rates change daily. This is a snapshot meant for comparison only. Your own rate will vary. Check your custom mortgage rates here.

It’s unusual to see such a wide spread between purchase and refi rates — especially one that favors purchase.

So for buyers in a good financial position to buy a home during COVID-19, it’s a uniquely good time to lock in financing.

>> Related: Is it STILL a good time to buy a house?

Shopping around for mortgage rates in today’s market

Mortgages are sold in a competitive marketplace, so borrowers can typically find a better deal by shopping around with a few lenders.

While mortgage rates are central to the shopping process, there are other factors borrowers need to consider.

• What is the interest rate and what is the annual percentage rate (APR)? A high APR suggests the loan has a lot of costs and fees
• How much down payment is required? What happens to the interest rate if you borrow with less cash up-front?
• What is the minimum credit score needed to qualify for a given loan product?
• How long do you have to close?
• If a borrower cannot close during the lock-in period, then what is the cost of a new rate lock?
• What is the maximum debt-to-income ratio (DTI)?

The answers to these questions will affect what mortgage rate you actually qualify for with any given lender.

For more tips on finding the lowest mortgage rates, see “How to shop for a mortgage and compare rates.”

Will we see mortgage rates drop again in the future?

At 4% it was argued that mortgage rates would go lower, and they did. The same happened at 3%. We are now cautiously entering in the 2% range.

Is it really possible to think of mortgage rates dropping below 2%?

Last June I wrote that “the very same factors which led to 3% financing are likely to lead us into the world of 2% mortgages. There’s an ongoing imbalance between investors with cash and people who want to borrow. Cash is everywhere and more of it is likely coming to a mortgage lender near you.”

The imbalance continues today. And it’s not unreasonable to think of mortgage rates dropping below the 2% mark. It’s not guaranteed, and it won’t happen tomorrow, but it’s not out-of-the-question either.

Mortgage rates are determined by marketplace forces; supply and demand. The usual ebb and flow that we might expect with mortgage financing have now been distorted by the pandemic.

On the demand side, more than 36 million people became jobless in just the past two months because of the Covid-19 pandemic. Retail sales in April were down 17.8% when compared with a year earlier. Consumer spending makes up almost 70% of the national economy.

Reduced job totals and less spending mean less demand, with fewer people able to qualify for mortgage financing.

There‘s a flood of cash on the supply side. Worldwide, trillions of dollars are available with negative interest rates. Even inside the U.S., there’s now talk of negative interest rates.

Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minnesota, wrote in Bloomberg last month that “unprecedented situations require unprecedented actions. That’s why the U.S. Federal Reserve should fight a rapidly deepening recession by taking interest rates below zero for the first time ever.”

What the near future holds for mortgage rates

Are lower mortgage rates really possible? The foundations for lower rates are certainly there, next we’ll have to see what the market says in the coming year.

In the meantime, borrowers can profit from lower mortgage rates than we’ve ever seen in the U.S.

If you’re a few months out from buying or refinancing, you might wait to see if rates go lower.

But if you’re on the verge of locking and you can qualify for a rate below 3% right now, that’s a rare opportunity many experts would say not to pass up.