If you’re playing the waiting game with mortgage rates, you may not want to wait much longer.
A new study from Haus, the home-finance startup created by Uber co-founder Garrett Camp, examined what role seasonality, loan size, credit scores and other factors play in the mortgage rates that lenders offer borrowers.
The study found that much like the housing market itself the mortgage market ebbs and flows with the seasons. And January, as it turns out, is the best time of year to get a new home loan on average.
In January, lenders offer a discount of nearly 20 basis points compared to the time period between June and October when rates are typically the highest for the year. The cooler weather, in general, brings out lower mortgage rates, with December and February being the next-cheapest months based on the Haus study.
“While we can’t say for exact certainty why rates are lower in January than in the summer months, we can speculate that competition for customers matter,” Ralph McLaughlin, chief economist and senior vice president of analytics at Haus, said in the report.
“Since home buying and refinancing is seasonal, there is less mortgage origination in winter months, so it could be that lenders must lower their rates to stay competitive and attract business,” he added.
To produce the report, Haus analyzed loan data from Freddie Mac for more than 8.5 million mortgages originated between 2012 and 2018. When examining for seasonality in mortgage rates, the company controlled for other characteristics, including the borrowers, size of the loan and the property.
Nowadays, scoring the lowest rate possible can be akin to finding a needle in a haystack, McLaughlin noted. Although mortgage rates have risen from the record low set right before the New Year, they remain extremely low by historical standards. However, economists have warned that as the year goes on rates could rise, depending on the trajectory of the pandemic and the related economic recovery.
But the timing of when a prospective borrower applies for a new mortgage is just one factor that can save them money. The size of the loan is another consideration. Loans with balances between $350,000 and $450,000 typically fetch a 23-basis-point discount on the mortgage rate compared to mortgages under $100,000, Haus found.
The savings is actually a reflection of the cost for the lender to originate a loan. “The cost of paying someone to originate a loan is the same for a $500,000 mortgage as it is for a $100,000 mortgage, but the latter provides less of a return to the mortgage originator than the former,” McLaughlin said. “In order to help cover this fixed cost, lenders likely increase their rates for lower balance mortgages to compensate.”
Of course, borrowers can only control so much when it comes to the timing of when they apply for a loan or how large the loan is — especially if they are using it to buy a new home. As the study stresses, other factors can have an effect on the rate that’s offered. People with credit scores above 800, for instance, will receive mortgages with rates that are 42 basis points lower on average than borrowers with a score below 650.
And perhaps the easiest way to save money is by shopping around. Haus found that there was a difference of 75 basis points between the most and least expensive large mortgage lenders across the U.S. “This means that, all else equal, the same borrower would get a 5% rate with the most expensive lender and a 4.25% rate with the least expensive lender,” McLaughlin said.