The stock market turmoil of May 6 and the Greek bailout may have a positive side effect for US home buyers and homeowners … that side effect is lower mortgage rates. The upheaval in the markets led investors on a “flight to quality” as dollars flowed into Treasury bonds forcing yields higher and corresponding rates lower. The question becomes whether the market’s moves will be sustained, leading mortgage rates to remain lower or whether time settles investors’ nerves and mortgage lenders are reluctant to drop rates.
Historically, bond market rallies have led borrowers to flood the financial institutions looking to refinance their mortgages. This time, it appears that lenders are reluctant to move quickly to drop mortgage rates (http://www.americanbanker.com/issues/175_88/mortgage-refi-surge-1018849-1.html). It also appears that another quarter-point or more of rate reduction is needed to push a large number of borrowers into the refinancing pool.
Those already looking to refinance – me among them – are facing tighter underwriting and appraisal guidelines. In addition, the massive reduction in home values most of us have experienced over the past 2-3 years have left little equity in the home making refinancing an existing mortgage difficult at best.
The Federal Home Loan Mortgage Corporation or “Freddie Mac” announced that the average rate on a conforming 30-year mortgage stood at 5% on May 7, 2010. This is down 6 basis points (0.06) from a week earlier. The rate, however, is still higher than the 4.84% average a year ago.
Typically, borrowers must save at least 75-100 basis points (0.75-1.0) on their mortgage rate to have an incentive to refinance. In other words, the rate reduction and corresponding payment reduction must offset the costs of refinancing that typically include points and processing fees. That means that the rate needs to fall to somewhere around 4.75% to stimulate refinancing activity.
Mortgage lenders have reaped great benefits since the year 2000 from cycles of refinancing activity. Rates at their current level are still lower than they were in 2003 when mortgage volume hit a record $3.39 trillion (www.americanbanker.com/). While refinance activity has been light in the past year, the recent extension of the homebuyer tax credit (purchases had to be in contract by 4/30/10 to qualify) has brought volumes back to the mortgage lenders. Rate reduction might be particularly attractive to lenders who want to keep mortgage staffs busy.
There is also risk that mortgage rates rise. The Federal Reserve announced last September that it would start selling off its $1.25 trillion of agency mortgage-backed securities beginning in March of this year. Bringing more mortgage product to the market might force rates higher, but so far, that has not happened.
Finally, lenders are facing much higher costs in mortgage lending, including refinance business. Increasing paperwork and contingencies burden lenders and brokers alike. Lenders are reluctant to take any “short-cuts” or chances when it comes to underwriting and appraisals in this economic environment, particularly due to falling home values that continue in many markets. Due diligence requirements are stringent. I know in my personal experience, verifications of student loans I have co-signed for my college-age daughter were requested for the first time. The student loans are in deferment (she is a rising college senior), but the mortgage lender wanted to know what the monthly payment will be more than a year from now when the loan payments potentially commence. The student loan lender balked at the request and, after three tries, finally met the paperwork requirements of my lender.
If you are interested in refinancing your current mortgage, go to your current mortgage lender first. I have a 7/23 mortgage loan where my interest rate was fixed for the first 7 years. I am into my 6th year, and there is a strong prospect that my current mortgage rate will adjust 2% higher. With falling mortgage rates right now, a rate increase was not one that I welcomed.
My mortgage broker (who I had worked with on my original loan) found my current mortgage lender most receptive. My current lender already has my mortgage loan and knows my immaculate payment history. The lender already has me as a credit risk and lowering my monthly payments is in their best interest. I am looking at a 5/25 loan where my mortgage rate for the first 5 years is going to be less than 4% and that rate will remain fixed for the first 60 payments. I expect, as I will be an empty nester in less than 5 years, to downsize and move. If that happens, I will not experience the risk of higher rates on my current home in year 6. I expect some upward movement in home values to return in my locality over the next 3-5 years, as well. In other words, I should be able to profit more from a sale of my home 3 years out than I would now … but, that also means my next house will be more expensive too. I also hope that the tax laws will retain the one-time exclusion from tax for profits from the sale of a primary residence as I downsize. That, too, is a risk.
One prospective hurdle was the appraisal on my home. However, I was pleasantly surprised at the value and the value held up even when my lender took it to their special review committee. The recent homebuyer tax credit has opened up the housing market in my area and the appraiser was able to get strong comparable sales to support the value. A year ago, this would not have been possible.
I hope to close on my refinance in the next couple of weeks. It has been a long process, but one that is worthwhile for my personal financial picture. Refinancing your mortgage might be a good option to consider with rates pressured lower by the recent Greek bailout and financial market turmoil.