Mortgage

Forecast: will the 2020 election change mortgage charges?

What happens to the mortgage rates after the election?

If you are looking to buy or refinance a home in the next few months, you should already be thinking about how to set the lowest interest rate.

What you might be asking is, how will the presidential election affect mortgage rates?

Interest rates hit a record low after the record low in 2020.

But could a surprise election result cause mortgage rates to skyrocket like they did in 2016?

If you're looking to buy or refinance anytime soon, here are some things you should know.

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Presidential elections and mortgage rates

Let's go back for a moment to 2016, the last presidential election.

Freddie Mac said the average mortgage rate rose from 3.47% in October to 4.2% in December.

If you've been a home buyer, refinanced, or had an adjustable rate mortgage (ARM) loan, this is a massive leap.

Mortgage rates from August 2016 to December 2016. Image: Freddie Mac

The catch is, the relationship between mortgage rates and presidential elections is hardly an apple-to-apple proposal.

In 2012, interest rates essentially stood still. They were 3.38% in October and 3.35% in DecemberFor 2008 the news was good. Interest rates rose from 6.2% in October to 5.29% in December, a sharp declineIn 2004 rates were largely unchanged. They were 5.72% in October and 5.75% in December

So how can we predict what will happen after the next election?

Is there any reason to believe that anyone who wins the 2020 election can directly change mortgage rates in one way or another?

Interest rate forecasts for 2021

Last year, the typical mortgage rate forecast for 2019 said interest rates would rise to well above 5.5%.

What actually happened was the opposite: weekly interest rates were 3.68% at the beginning of December after 4.75% in the previous year.

Today's forecasts assume that mortgage rates will be around 3% in 2021.

However, the 2020 election winners can have a significant impact on mortgage rates depending on what action they take.

Markets could expect a Biden win but get Trump. This would reflect the 2016 election when Clinton was a sure win. Trump was seen as the more business-friendly candidate, and mortgage rates jumped on high hopes for a stronger economy. But the opposite could happen: a Biden victory could spark new optimism and raise mortgage rates in the hopes that new leadership will usher in positive change as the COVID-19 response could affect markets. If a candidate is expected to shutdown to curb the spread of the disease, interest rates could fall amid fears of economic impact

In short, it is difficult to say exactly how a new president will move the interest rate needle.

Those who can benefit from low rates now should do so.

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Who – or what – sets the mortgage rates?

Nobody – not the President, Congress, or the Federal Reserve – sets mortgage rates.

Interest rates rise and fall with the push and pull of the financial markets. Not just markets within our borders, but markets around the world.

This is because money moves at electronic speeds to the places and investments money managers hope will give the best combination of risk and return.

>> Relatives: How Fannie Mae, Freddie Mac, and the Mortgage Market Work

Before the 2020 election cycle, interest rates are remarkably low.

The visual capitalist has been concerned with interests for the past seven centuries – seven centuries in fact! – and found that today's interest rates are "at 670 year lows".

Interest rates from 2000 to 2020

Image: VisualCapitalist

This may sound good to borrowers, but extremely low interest rates can be a worrying sign.

Borrowers simply no longer compete for cash as they used to. There isn't much pressure to raise interest rates.

According to Bloomberg News, $ 15 trillion is being invested worldwide at negative interest rates – interest rates below zero.

Not many people or businesses want cash to create new factories, technology, or jobs. Worse still, big investors actually pay banks and other institutions to hold their money.

In other words, the signs of economic improvement that many are hoping for would actually drive interest rates in the wrong direction (up).

What to look for after making your choice

Federal debt and mortgage interest

The president doesn't control mortgage rates. However, the 2020 elections could continue to affect interest rates.

The federal government's national debt is now over $ 23 trillion – and rising. So much debt creates large interest payments.

In fiscal 2019, the government paid $ 575 billion in interest, up from $ 523 billion the previous year.

And when the government borrows, it competes with the private sector for cash.

A massive increase in demand should drive interest rates, including mortgage rates, higher. And yet that didn't happen. There is simply too much cash and too little demand.

Thus, the 2020 election winner faces difficult decisions.

Will the next election winners cut federal spending to reduce the deficit? If so, which programs are being cut? Will they increase the deficit with higher federal spending? Will more federal spending trigger a difficult round of inflation? Will the 2020 election winners raise taxes to reduce debt? Which taxes?

Any choice will have far-reaching implications.

In the meantime, federal interest costs will rise if interest rates rise only marginally.

A 1% rate hike can mean hundreds of billions of dollars in higher federal interest payments.

FHA insurance costs and the 2020 election

The FHA mortgage program is a huge success. It raises a lot of money from insurance premiums at a time when foreclosures are few. The result is a massive excess.

So where does the money generated from FHA loans come from – and where is it going?

In short, the FHA insures mortgage loans. This insurance allows borrowers to buy with just 3.5% off. Borrowers pay insurance premiums to get FHA assistance. And the insurance premiums collected by the FHA go to a reserve account.

The FHA should have a reserve of 2%. In fact, the reserve is now greater.

What will the next election winners do about the FHA surplus? Will you keep collecting the money or will you reduce FHA insurance premiums?

The current government says it will not change FHA mortgage insurance rates. But that could change under a different president.

Lower premiums would allow more people to buy homes, which can lead to a surge in home sales across the country.

The Federal Reserve and Mortgage Rates

The Federal Reserve is an independent body responsible for running the country's economy.

So far, in 2020, the Federal Reserve has lowered the key interest rate – the money banks pay for borrowing overnight – to a level close to zero.

Mortgage rates are not controlled by the Federal Funds Rate. But a low interest rate environment certainly helped keep mortgage rates down.

No matter who is elected, no one expects the Fed to raise rates anytime soon. The coronavirus poses too great a risk to the economy to do so.

What it all means for you

Predicting what will happen to mortgage rates in 2021 involves a whole series of “ifs” and “maybes”.

And as history has shown, presidential elections can have a positive, negative or no impact on mortgage rates.

So what should you do if you are looking to buy or refinance a home in the months ahead?

Stay in the market. Mortgage rates change daily. So if you're close to graduation, keep an eye on the daily rates – and be ready to lock in if they're in your favor.

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