What explains this borrowing frenzy?
Americans have recently borrowed a lot of money to buy houses. According to recent research, the total outstanding mortgage balances on consumer credit reports increased by $ 182 billion between the third quarter of 2020 and the end of December of last year.
That’s a big increase in total mortgage debt in a short period of time. In fact, the data from New York Federal Reserve shows that the number of new mortgages has reached a new high. Lenders actually issued $ 1.2 trillion in new mortgages in the last quarter, which includes both refinances and new purchases.
All this borrowing activity can make you wonder Why so many people were so anxious to get home loans at the end of last year. And there are some good answers to this question.
Americans were eager to apply for mortgages as rates fell
The main reason why so many Americans have taken on so much mortgage debt is that it was incredibly affordable to get a home loan last year. In fact, during 2020 mortgage rates hit a new high huge 15 times. This was based on data from Freddie Mac, who has been monitoring mortgage interest rates for almost 50 years.
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Many factors have driven rates down. One was the fact that the Federal Reserve bought billions of dollars in mortgage debt in an effort to help support the economy.
With interest rates coming down, it is cheaper than ever to borrow and buy a home. It was once unimaginable to get a 30 year fixed rate loan for less than 3.00%, but it has become the norm. And Americans have struggled to take advantage of these historically low rates by buying new homes or refinancing existing loans.
When mortgage rates drop, not only do homeowners want to take out loans, but it can also be easier to qualify for larger loans. Economic uncertainty caused by the COVID-19 pandemic means lenders have become more stringent in their qualifying standards. But stricter credit standards haven’t stopped many Americans from borrowing.
You see, lenders look at your debt relative to your income and they won’t allow you to borrow more than a certain percentage of your income. Low interest rates mean lower monthly mortgage payments, so you may be able to borrow more money.
The widespread lockdowns have also resulted in changes in consumer behavior that have helped fuel the mortgage frenzy. The rise of remote work has allowed people to move around. In some cases, this meant moving from cities where real estate was unavailable to areas where it was possible to buy a house. Americans sheltering in place were also looking for larger homes to better meet the needs of their families.
A final factor is that fewer homeowners wanted to sell, even as demand increased. And that has pushed up real estate prices. As homes got more expensive, buyers had to pay more and therefore took out larger mortgages.
Home ownership creates wealth
All of this contributed to the fact that outstanding mortgage balances increased by leaps and bounds last year. The good news is that mortgage debt is generally considered “good debt” because homeownership helps build wealth.
Hopefully, most Americans who borrowed to buy a home in the last year have made sound financial decisions. If so, the surge in mortgage debt could turn out to be a good thing.