High Mortgage Demand Keeping Refinance Rates Up at Low Levels

Way back in December 2008, immediately following the US government’s announcement that it would buy back $500 billion in mortgage backed securities glutting the market, mortgage refinance rates dropped significantly to all-time lows. Although treasury yields have subsequently remained rather stable at or near historic lows, mortgage rates have bounced back upward a bit. Don’t get me wrong, rates are still at excellent levels for those with good to great credit and those with at least a 20 percent equity stake in their home. It’s just that the mortgage spread has ballooned once again.

The reason? Well, its because the rates have been so low, people have been flocking to submit their new home loan applications. Mortgage demand is at its highest level in five years, yet lender capacity to process these loans is not at full steam, rather at the barebones level. You can’t blame the lenders as they were forced to downsize, as loan applications prior to the December rate drop were woeful at best.

It may seem hard to believe, but lenders are jacking up the spreads to slow down the volume until staffing is at appropriate levels. Again, don’t blame the lenders, they are reacting out of necessity. The good news is that even with high spreads, refinance rates are still at historic low levels.

If you are currently getting ready to apply for a refinance home loan, it is now more important than ever to choose the proper mortgage lender. Those that are increasing staff levels and those that have strong loan processing procedures already in place. Locking a great rate is wonderful, but only if your lender can get your loan closed, and in an appropriate timeframe. You don’t want to have your rate lock expire before close or have prolonged delays in processing for underwriting stipulation requests. Remember that recent and stricter underwriting guidelines have made loan processing a bit tougher. Add an increase in refinance application volume, and you want to be with the right lender.

I know, we all want to know what the rates and fees will be with any quote, but now you should ask one more question. Mr. Lender, will you please describe your loan process flow and expected turnaround time? Also, is your company currently hiring extra staff to help expedite the processing of current loans?

The mortgage spread should decrease in the coming months as lenders return to a proper balance between staff and application levels. It is for this reason that one should expect current low refinance rates to stick around for a while longer. Even if mortgage yields increase, the reduction in spread could keep rates at this level for a long time.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Reduce Mortgage Term While Paying The Same or Lower Monthly Payment

The recent dip in mortgage refinance rates has opened the floodgates for savings hungry homeowners to apply for new home loans. There are a variety of reasons that people refinance. Lower rates, lower payments, debt consolidation, to switch from an adjustable to fixed rate loan, or to shorten their mortgage term, among many.

Now, before you go jumping into a 15-year fixed rate mortgage in an effort to reduce your current 30-year loan, consider the following.

Currently, the spreads between 15-year and 30-year mortgages are very slim, meaning that the qualifying refinance rates are very similar between the two terms. Historically, one would expect a much lower rate for the shorter-term loan, but that has changed, at least currently. If you are considering a shorter-term mortgage with a lower rate, you may actually want to consider refinancing into a 30-year fixed rate mortgage instead of a 15-year option.

To illustrate the strategy, assume a refinancing homeowner currently has a 6.5% 30-year mortgage, with a $250,000 balance, and has paid on the loan for 3 years, so the remaining term is 27 years. The original loan amount was $260,000 with a current payment $1,643.

Assume that the borrower can refinance into a new 30-year fixed rate at 5.0% with total closing costs of $8,000, so the new loan amount is $258,000 with a new monthly payment of $1,385. This would result in a net savings from current payment in the amount of $258 per month. By applying this $258 per month savings toward principle each month, the current $1643 payment will remain the same, but the term will be reduced to 21.25 years, and a net reduction in term of 5.75 years for the cost of an appraisal.

If the homeowner went the 15-year route (closing costs being the same), the new payment would be $2,040, yielding a difference of $655 per month in payment between the 15 and 30-year 5.0% options. Applying an additional $655 per month to the new 30-year payment would result in…you guessed it… a 15-year loan term.

The point being, if you can refinance between the two terms for basically the same rates and fees, the 30-year option gives the homeowner the most control and repayment options for the same objective (reduced term), without being pigeon-holed into a higher monthly payment. Depending upon the individual, this may be the way to go.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Read the Bottom Line, Not the Refinance Closing Costs

Far too common in mortgage refinance, significant financial benefits are lost to potential borrowers because of closing costs. Many refinance shoppers see a several-thousand dollar amount for lender fees and settlement costs, and quickly slam the door before they really look under the hood. Quickly scoffing at closing costs and not assessing the bottom line financial impact of a new refinance home loan could end up costing a homeowner thousands in real benefits if they stay with their current mortgage.

Now, what you really want to assess, are two crucial key components. 1) How long do I plan on staying with the new home loan if I refinance now? 2) What is the bottom line payment for the refinance after closing costs are rolled back into the loan.

For instance, suppose you are refinancing your current 30-year mortgage that has a balance of $193,000 that you have been paying on for 2 years. Your current rate is at 6.5% and your monthly principle and interest payment is $1,248. You are qualified for a 4.875% 30-year fixed rate with closing costs of $7,000, so your new loan amount would be $200,000 at 4.875%. This would result in a principle and interest payment of $1,058.

The total bottom line savings is $190 per month and the breakeven point for closing costs is 37 months ($7,000 closing costs divided by the $190/month savings).

So if you plan to stay in the new mortgage for more than 37 months this is a good deal. If not, then you might be better off to stay with your current mortgage.

So, what do you stand to lose by screaming about the $7,000 closing costs and axing the refinance plans altogether?


Current Monthly P&I Payment $1,248
Proposed Monthly P&I Payment $1,058
Total Monthly Savings $190
Closing Costs $7,000
Break-Even Point (Months) 36.84
1st Year Cash-Flow Increase $2,280
5 Year Savings $4,400
10 Year Savings $15,800
15 Year Savings $27,200
20 Year Savings $38,600
30 Year Savings $61,400


So, you can see in a real world current example that paying closing costs may not be such a bad thing for your financial well-being, as long as you account for the bottom line and the length of period you plan to stay with your new home loan.
May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Mortgage Refinance Rates Remain Low as Discount Point Spreads Shrink

The good news is that mortgage refinance rates remain at low levels and appear that they may be stable for a while. The other rate related news is that discount point spreads have shrunk for 30 year fixed rate mortgages, which could add more benefit to those refinancing and staying with their new mortgage for at least 5 years.

In general historical terms, one discount point would reduce a borrowers interest rate by an amount between 1/8% and 1/4%, depending upon the lender and the loan scenario. So, if you were refinancing say $200,000, it would cost you $2,000 for each discount point applied to buy-down your rate. For at least the time being, that same $2,000 will most likely decrease your interest rate by more than1/4%, which is huge for those wanting to refinance for the last time. The reason for this shrinkage in discount point spread is because the base par mortgage rates are already currently low, so low that lenders at betting that those refinancing will stay with their new mortgage for the long haul, and the banks will collect the mortgage interest for many more years than for home loans taken out earlier this decade. The lower your fixed rate, the longer you will most likely stay with the loan, so the less charged to buy down.

Oddly enough, even with the current low mortgage refinance rates, they could be lower. With the 10 Year Treasury Yield hovering between 2.0% and 2.5%, historical mortgage spread premiums would dictate a 4.5% par rate on a 30 year fixed mortgage, yet the national averages are currently over 5.25%.

Mortgage spread premiums are generally in the 3% range currently, which is at a very high level. The reason? Current lender staffing levels are one major culprit. Most lenders are bursting at the seams with new mortgage applications because of our sudden and deep rate drop, after suffering through severe downsizing in the industry. By keeping rates up a bit more than they have to be, lenders can offer historically low interest rates, do less loans, and make the same money with a higher profit margin.

Though the spread is high, most will experience a nice financial benefit by refinancing at the current rates if their current mortgage rate is 6.5% or above. For those with less than perfect credit, the FHA loans programs are also offering incredible value at the present time.

The biggest hurdle to getting those sweet low rates is coming down to home values. If you have adequate equity in your home, the mortgage rate world is your oyster, even with poor credit scores, as long as your score is at the 580 or above. Those that have great credit scores and little equity in their home should also check out the FHA refinance loan option, as you can finance up to 97% of the equity in your home and still get near conventional grade pricing.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box