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Are Mortgage Rates going to go lower? Should you wait to refinance?

Posted on December 12, 2008 by Ray Williams (NMLS #216267).

I was having an email discussion with a client this morning about the state of rates as we explored the potential refinance on his home. He mentioned listening to a local radio station last night and that someone mentioned that rates for people with good credit will go lower , and they should wait to refinance. Let’s explore this:

“The market has ran 287 BPS since November 25th, and still it will take another 100 BPS probably to get 5.375% on a no cost option (this is where your typical fees from the lender and title company are NOT wrapped into the loan, but paid by me the lender on your behalf). We are way above the last 2 year low’s for rates. The gut would say bonds are in an over bought state and stand to be pulled down (higher rates). We need 100BPS more in run, probably before lenders will come off that 5.375% and 200BPS more to see 5%. If we see 5% hold on to your hat. But I might be willing to put my first born on the line that we won’t see that happen, given historical data”

Here is some more food for thought on all of our personal situations:

“Here is my advice. Given my 6 years experience with the markets I can say we are at historical lows. Now mind you there are fees in excess of $5,000 (lending and title) for any typical refinance. I have a VA (veteran) client right now who could in fact get 5% , however, paying $5,000 to go to 5% instead of 5.5% with no fees would be a mistake. If you saved an extra $60 per month (5% versus 5.5%) and it cost you $5,000 to do so, you would have to wait 84 months ($5,000/ $60 savings) minimum before it made sense to do that lower rate”
I am not sure what conversations they are having on that show or if they even go deep enough to explore this topic, but from a financial sense it will never make sense to pay those extra fees if you don’t have too, in order to save an extra $60 per month. I have another client who is waiting for lower rates, so I can respect that. I will say I have never done a true no cost refinance below 5.5% in 6 years. Hedging on a market that shows historical trends can be very bullish, but might leave many people out in the cold. There are other entities buying mortgage backed securities beyond our government. Once the yield on the mortgages continues to drop (lower rates equal lower yields) they will get to a point where the return isn’t worth the investment and direct their monies elsewhere. At that time you will see rates go higher.

We all have individual situations, but right now I am experiencing that many people are still working with inexperienced professionals selling them a mortgage. This is a toxic mix. Is it more important to you at a time of flat housing prices to increase your loan amount with fees to achieve a lower rate? That is a personal question, but explored with a caring advisor, you will have a tailored solution you feel good about. After all, would you feel good adding $8-10K to your current loan balance, all in the name of .5% and $60 per month of additional savings? Two people I am now working with almost walked down that road. 

Rates are also different for folks who have conventional loans, and conventional loans with mortgage insurance. You may see that combining the two mortgages and going into FHA could yield you substantial savings (due to FHA mortgage insurance and rates). Conventional rates are tied heavily to your FICO score, as is, conventional mortgage insurance at this juncture.

Be wise as you explore refinancing right now. An extra 30 minutes with the right person could save thousands in equity and interest on your loan.

Ray

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