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Could Mortgage Rates Really Drop to Zero?

It’s unlikely the Fed will drop interest rates to zero as Pres. Trump requested – but if they did, it would have an upside and a downside for homebuyers.

NEW YORK – President Donald Trump has called on the U.S. Federal Reserve to drop interest rates to zero, or even negative, at its meeting this week. That has sparked several discussions on how that could impact the housing market.

For one, that could mean cheaper mortgages for homebuyers, housing analysts say. While the Fed’s benchmark rate does not have a direct influence on fixed mortgage rates, it does often influence them.

“If the federal rates go down to zero, mortgage rates could drop from 3.56% for a 30-year fixed-rate loan, as of Thursday, to, well, nothing,” realtor.com reports.

Is it feasible? Bank of America officials told USA Today: “We believe negative rates in the U.S. are a possibility.”

How would a zero mortgage rate work? “Most people think they’d get money back … but not really,” says George Ratiu, senior economist at realtor.com. “A portion of your loan is forgiven each month so you end up paying a little less over the life of the loan.”

However, buyers and refinancers could expect fees to rise as a result. Lenders would still need to turn a profit.

Lower mortgage rates cause payments to go down and could lead to more qualified buyers, Don Frommeyer of CIBM Mortgage in Indianapolis said. “Their debt goes down, and they become eligible to buy a bigger home,” he says.

One country has already seen the impact from low- or negative-rate loans. Denmark’s third-largest bank, Jyske Bank, began offering its customers 10-year mortgages with a negative 0.5% interest rate. Clients pay the bank less than they owe on the loan. Other banks in the country are following suit.

Low interest rates could be a boon for home shoppers, but for savers or retirees who live off their savings it could be a “tremendous blow,” Ratiu says. “They would end up having to pay money to keep their funds in the bank. You’re not likely going to be incentivized to save.”

Zero interest rates would also make it tougher for some people to save for a downpayment.

Source: “Trump Wants Zero – or Negative – Interest Rates: What That Would Mean for Mortgages,” realtor.com® (Sept. 12, 2019) and “Trump Wants Fed to Cut Interest Rates to Zero or Below. Here’s What It Could Mean for You,” USA Today (Sept. 12, 2019)

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