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Fed rate cut, what does this mean for mortgage rates?

Posted on December 16, 2008 by Ray Williams (NMLS #216267).

The million dollar question after the rate cut today (Tuesday) was, “Ray, what will happen to mortgage rates?”

What you have to understand is that we are already at 50 year lows for mortgage rates. So to see rates continue to drop would equate to new lows in mortgage rates. Beyond our government saying they are going to buy mortgage backed securities, there are other entities that buy them as well. Pimco, the largest purchaser of bonds, is a big player. The chinese investors are a big purchaser of them as well.

First, I would read : One journalist’s opinion about what this means. He actually figured out what us in the industry have always known. FED RATE CUTS DON’T EQUAL LOWER MORTGAGE RATES. Today, however, they also mentioned they were going to buy up more mortgage backed securities. That could lead to lower rates.

If I were refinancing (as I actually am), here is what I would look at. If you ask a lender about refinancing, ask them what the fees are for the market rate. But don’t underestimate the power of asking them about the no cost option. I mean the true no cost option! This is where your lending AND title fees are absorbed by the lender. Let’s take this deeper. If, you get the lowest rate (say 5%) on your $200,000 mortgage, your principal and interest will be $1,073~ However, add to that lending fees of 1% origination, processing, underwriting, credit report, doc prep and that totals $3,500 and don’t forget title fees of about $1,300 as well. This totals $4,800 you will either add to your current loan or bring to the closing table.

OR: you take the true no closing cost option at say 5.5% with a principal and interest ($200K) at $1,135 (or $62 more per month). Now with that you actually have either a loan balance that is $4,800 lower or that much more in the bank after closing. Now only you can answer the question of is the lowest rate more important, or is the lowest cost loan more important?

Bear in mind, your tax bracket effects this equation, the time before you plan on selling or refinancing again also factors in the equation. So what I am getting at is the fact that the $62 savings is at a cost of $4,800. Which means you lent yourself $4,800 at a return of $62 per month. If you take simple math, it will take you 77 months to repay yourself $62 per month to make up that $4,800 you paid to get the lower rate. Will you have the house in 6.5 years, or the same loan? I didn’t even factor in the mortgage interest portion (remember this is tax deductible, so lower rates equal less tax deduction).

Now, after my tangent. If you are thinking rates are going to get lower, know that in just my 6 years of monitoring the driving forces of rates, I have never been able to do no cost refinances at a lower rate then 5.5% for fixed rates. So, will they get lower? Don’t get caught in the cold listening to the journalists (remember they are journalists!).

Ray~

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