What a 0% mortgage rate would mean for housing

U.S. President Donald Trump last week called on the Federal Reserve to drop its key interest rate to zero, or even negative, when it convenes its next meeting later this month. The call has sparked discussion among real estate experts on how zero interest rates would impact the housing market.

The obvious impact is that the move would likely lead to cheaper mortgages for home buyers. Although the Fed’s benchmark rate doesn’t have a direct influence on mortgage rates, it usually does 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 reported.

That may seem unheard of, but Bank of America officials told USA Today: “We believe negative rates in the U.S. are a possibility.”

So how would a zero mortgage rate work?

George Ratiu, senior economist at realtor.com, said that consumers who think they’re going to get money back would be in for a disappointment, as it doesn’t really work that way.

Instead, “a portion of your loan is forgiven each month so you end up paying a little less over the life of the loan,” he explained.

Buyers and refinancers could also see their fees increase too, as lenders might need to raise them in order to remain profitable.

Still, a zero interest mortgage rate would almost certainly mean lower payments and more qualified buyers, said Don Frommeyer of CIBM Mortgage.

“Their debt goes down, and they become eligible to buy a bigger home,” he said of most borrowers.

We can also look to Denmark for an example of the impact of a zero interest mortgage rate. Earlier this year, Denmark’s third biggest bank, Jyske Bank, began offering customers 10-year mortgages at a negative 0.5% interest rate. It means that borrowers are paying the bank back less than what they owe on the loan. And Jyske Bank isn’t alone, as others in the country have followed suit.

Still, zero interest rates might not be appreciated by everyone, Ratiu warned. He told realtor.com that it could be a “tremendous blow” to retirees and other savers who are living off their savings.

“They would end up having to pay to keep their funds in the bank,” he said. “You’re not likely going to be incentivized to save for a down payment.”