Could We See 0% Mortgage Rates?

Imagine financing a home purchase with a no-interest mortgage. You’d probably never want to move again.

Granted, it’s doubtful you’ll ever have that luxury. But if rates continue to drop, as some in the mortgage industry suggest they may — especially after the Federal Reserve’s recent statement that it was prepared for more extraordinary measures to pump up the economy — mortgage rates could inch in the direction of 0%. Continued concerns of deflation may also put pressure on mortgage rates.

Think about it: 0% financing has long worked as an incentive in the auto industry. And homebuilders have been known to pay down mortgage rates for their buyers, so these days it wouldn’t be unheard of for them to entice people with a 2% or 3% mortgage rate, at least for a period of time.

That isn’t to say mortgage rates couldn’t drop further from their current levels. After all, two years ago, few people would have thought a 4% mortgage was possible.

We don’t know how much lower rates could fall, if they fall at all. But let’s continue to play a little game of “what if mortgage rates hit zero.”

Rates at or near 0% could bring more first-time homebuyers out of hiding to seek out extremely favorable financing for a house, get more buyers in the mix, and demand for homes could kick up, thereby helping boost home prices.

If this 0% financing were available for refinancing, demand would likely surge to the point where banks, title companies and appraisers would be over capacity and understaffed. In theory, hiring would increase to meet demand. In addition, refi-eligible homeowners would see a marked reduction in monthly payments, spurring consumer spending.

Still, as always, low rates won’t mean much to someone who doesn’t have a job to buy a home or isn’t optimistic about the economy.

Zero percent financing has worked for the auto industry. Don’t look for it (in our lifetimes) in the housing industry.