Who Would Benefit the Most From a Drop in Mortgage…

Who Would Benefit the Most From a Drop in Mortgage Rates?

Homeownership is often seen as a key tenet of the American Dream. Unfortunately, interest rates remain stubbornly high, making it challenging for would-be buyers and Americans looking to refinance to accomplish their goals.

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Most people would benefit from a potential rate reduction, but some may prosper even more. Here’s who could benefit most from a drop in mortgage rates.

First-Time Homebuyers

First-time homebuyers often face numerous headwinds getting into a house. Combine high mortgage rates and lagging inventory, according to Zillow, and it’s difficult to find a house many first-time homebuyers can afford.

These first-time homebuyers would benefit from a drop in mortgage rates. “A small shift in rates can unlock affordability for them in a very real way — especially first-time buyers. They’re often working within tight budget constraints, so even a 0.5% drop can make or break their ability to qualify or get comfortable with a monthly payment,” said Alex Shekhtman, CEO of LBC Mortgage.

Such a drop might reduce a mortgage payment by several hundred dollars, which can be significant for a new buyer, as it can also reduce the down payment necessary to buy. “That emotional tipping point is huge,” Shekhtman said.

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People Looking To Refinance

Refinancing a mortgage is a great way to lower monthly costs, particularly for Americans locked into a high rate. The current mortgage rate for a 30-year fixed-rate mortgage is near 7%, according to FreddieMac, which is notably higher than just several years ago.

Americans looking to refinance could benefit from lower rates, but it’s on a case-by-case basis. “Just looking at someone who wants to refinance when rates drop — some homeowners will save $150-$200/month, which is nice but doesn’t make a huge impact,” said Steve Hill, broker associate at SBC Lending. This may not be significant enough for some, while for others it could mean real breathing room.

This begs the question of when it makes sense to refinance. “I usually relate it to dollars, someone should save $150-$200/month for a refi to make sense. For lower loan amounts, that’s 0.5% in rate or more. And for larger loan amounts, that can be as low as 0.25% in rate,” Hill said.

Move-Up Buyers

Americans looking to upgrade their home could benefit from a reduction in mortgage rates. As with people looking to refinance, how much it will aid the homebuyer depends on their particular situation.

“A 0.5% drop might not sound like much, but it can increase purchasing power by tens of thousands of dollars. That means a better location, a home that fits long-term needs or just more breathing room month-to-month,” Shekhtman said.

Doing the math is essential for move-up buyers. It may make sense, but if there’s minimal inventory at the next price point, it could make purchasing a challenge.

Why Are Interest Rates Staying Stubbornly High?

It’s easy to believe that actions by the Federal Reserve directly impact mortgage rates. That’s not the case. Rates typically track the yield on 10-year Treasury bonds, according to The New York Times.

Sentiment plays a key role too. “The biggest thing to monitor is market psychology — how people feel about the future. This goes for investors and people on Main Street. Are they feeling positive about the future, as if they can take on the world? Or are they worried and anxious about all the uncertainty going forward?” Hill said.

Mortgage rates play a key role in buying a house or refinancing for most Americans. As you monitor rates, do the math to make sure a move makes sense for your finances.

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This article originally appeared on GOBankingRates.com: Who Would Benefit the Most From a Drop in Mortgage Rates?

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