Mortgage Applications Are Increasing. Here are 3 Things to Know.

It seems just about everyone is applying for a home loan right now. According to a recent report from the Mortgage Bankers Association (MBA), mortgage applications are up 40% compared to the same time last year. Why the increase? Why are so many people looking to buy a home right now, and should you be one of them?

[ Read: Best Mortgages for Bad Credit of 2020 ]

The report cites historically low interest rates as one reason for the spike in mortgage applications. Objectively speaking, this is a good time to buy a home, but is it a good time for you? There are factors to consider, including your personal finances, the cost of owning a home and the overall state of the housing market. Also, if you already own a home, keep in mind that refinancing right now could save you hundreds of dollars a month.

Mortgage demand is 40% higher than last year, should you buy a home?

Before you even start looking for a home, take a look at your credit score. A higher credit score generally translates to a better mortgage rate. Also, do you have the money for a down payment, and is your income stable? Keep in mind most lenders want borrowers to pay 20% of the loan amount upfront. Not doing so means higher monthly payments and you’ll also have to pay for private mortgage insurance (PMI).

Even if your finances are in good shape, there are still some things to consider.

1. The average loan size could continue to increase

The report mentions the average loan size continues to increase and now stands at $368,600. This is a trend that some experts believe will continue. “We can expect to see loan sizes continue to slowly increase so long as the real estate market continues to take off,” says Nishank Khanna, Chief Marketing Officer at Clarify Capital

[ Read: Best Online Lenders of 2020 ]

“Appreciating home prices is a combination of two factors: increasing demand and decreasing for-sale inventory. We’re seeing both of these elements at play.”There’s also a flip side to this increase in loan size. Prices are increasing, but interest rates are falling.

“Mortgage rates just dropped to 2.86%, which is a 30-year low,” explains Real Estate Broker Michael Dean. “This means massive savings for homebuyers. A $300,000 mortgage will currently cost you a whopping $50,000 less in total mortgage payments than it would this time a year ago.”

2. Your savings could be worth the cost of refinancing right now

Maybe you already own a home and are looking to refinance. Refinance applications dipped down over a recent three-week period, but are up again. Refinancing makes sense if you plan on staying in your home for a while and are currently locked into a high interest rate. A report from the mortgage data firm Black Knight shows that an interest rate reduction of three-quarters of a point could generate an average of $290 in monthly savings for current homeowners.

[ Read: The Best Personal Lines of Credit in 2020 ]

“It’s imperative to keep an eye on interest rates before pulling the trigger,” adds Khanna. “A typical rule of thumb is to look for interest rates at least 1% lower than the original loan. If the rate is less than a percent, the savings are often negated by closing costs, which average out to be a couple of thousand dollars.”

3. Mortgage rates are low, so who’s buying?

A lot of people are filling out mortgage applications. There’s a trove of information to sift through when it comes to who is buying a home and where. Khanna has looked at the data and sees two big takeaways in terms of who’s buying. 

“Millennials have taken a lot of flak from the media for their delayed ownership, but now we’re seeing this same group of people become first-time buyers,” he said. “Also, we’re seeing a lot of people who have excellent credit and are in a position to get a mortgage at a discount price invest in additional property with the intention of renting it out.”

There’s also evidence to suggest that current homeowners want more space. This can be directly traced back to the pandemic and the increased number of people working from home.

[ From Trent: 6 Ways to Make Your Mortgage Application Easier ] 

“Since the pandemic, we’re seeing a lot of urban exile,” says Dean. “Renting an apartment in crowded and expensive cities is less attractive when there’s no commute to factor in. People are leaving cities in favor of suburbia, where they can get more space at a lower price point.”

recent survey of prospective homebuyers shows that 13% of respondents are searching for homes in different areas than originally planned. The results are startling. Before the pandemic, 37% said they were looking to buy a home in the city — compared to 43% and 9% in the suburbs or rural areas. Currently, only 19% of participants are still searching for a home in the city, while 50% and 19% are looking either in the suburbs or rural areas.

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Eric Wilson Edge

Contributing Writer

Eric Wilson-Edge is a freelance journalist who has covered personal finance, banking, the economy and other topics for The Simple Dollar, The Seattle Times, Narratively and elsewhere.

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  • Andrea Perez
    Andrea Perez
    Personal Finance Editor

    Andrea Perez is an editor at The Simple Dollar who leads our news and opinion coverage. She specializes in financial policy, banking, and investing.