Mid September Review

As summer winds down in the next few days, let's look forward to what the fall and winter seasons may bring in terms of lending rates and refinances:

We were it all time lows this month. What does that mean? For buyers with 740+ credit scores it means interest rates crept down to 4.25% with no points for a day or two. It came and went fast. For the most part...4.375% was the standard 30-year conventional fixed rate with no points. Don't get caught up with the Bankrate.com sites or Freddie Mac's published rate. Yes, you may in fact see a 4 or 4.125% rate out there. Read the fine print. These advertisements always come with .7% to 1% in discount points...and the media never explains these rates involve you, the consumer, paying to have that rate. That means on a 100k loan...it costs you $700 to $1000 to buy the interest rate they publish...and that is on top of normal closing costs.

I never publish such rates. It's not my way of doing business...offering a lower rate to attract clients and then saying, "...but at the cost of $$$$$$$$ to get that rate?" Seems like it's a bit of a bait and switch.

Anyway...back to rates. 15-year mortgages have crept down into the 3.75% to 3.875% range. Incredible!

When looking for a mortgage rate, and specifically a refinance opportunity, do not just ask "What is your rate?" (See above paragraph) Chances are, you'll miss out on the real bargains. Think about this...you are a client with a 100k mortgage and and 6% 30 year fixed interest rate. Now, we want to look at the difference between a 4.375% interest rate and 4.75% for a refinance opportunity...the difference in payment is about $21 per month. On the 4.375 rate, you would save about $100 per month. On the 4.75% rate you would save about $79 per month. For my clients, we can almost always do a refinance with no closing costs at 4.75% in this scenario (and not roll them into the mortgage). If a typical refi costs $2000 to $2500 when you factor in closing costs, appraisal, and title fees...would you rather pay a mortgage that saves you $79 per month and costs you nothing. Or would you rather have a savings of $100 per month at a cost of $2000?

Simple math tells us the answer as Option B is the winner right up until the break even point below:
Option A
In 10 years on the 4.375% rate, we save $100 per month or $1200 per year. This is a savings of $12,000. It cost us $2000. Net savings $10,000.
Option B
In 10 years on the 4.75% rate, we save $79 per month or $948 per year. This is a savings of $9480.

In short...unless you are going to be in the home for 10 years...why pay the up front cost? Because if you do, you better be in the home for 10 years or you paid for a refi that you did not obtain the full benefits of the program. Don't get caught up in the rate. Yes, it is important. Get caught up in the payment...the savings....the cost. THAT is where good financial decisions are made.

Outlook
Rates are going to go up...it could be tomorrow, it could be 6 months from now. Don't get caught up in thinking they could go lower from these historic levels. If they go down .125%...who cares? It's $8 per month on a 100k loan. What if they go up .5% tomorrow? That is $40 per month. There is more downside to waiting to lower your rate/payment than upside of rates going lower. And if you close on your home now...and rates do in fact go lower...just refi at my no cost option. You have nothing to lose!

Good luck...happy house hunting...and call me about that refi opportunity.

Ryan