Vail Daily column: Why are mortgage rates low right now?
There is a mini refinance boom going on in the mortgage industry. While there have been several of these in the past several years, this one was unexpected and not something that has caught the attention of the mainstream media.
There is an impression that when the Fed raised the discount rate at which it loans money to banks, mortgage rates automatically followed, and that is not the case. While it may set a long-term trend, mortgage rates do not move in lock-step with the Federal Reserve rate hikes or cuts.
I can recall many times in my career when the Fed cut rates and mortgage rates increased. Explaining that logic to callers was an exercise that honed my phone skills in the early days of being a loan originator.
The continued economic uncertainty concerning the impact of the price of oil and the shaky stock market have contributed to make investors uncertain about where to put their money. This results in a predictable cycle that has played itself out many times in which investors look for safe but low-yielding investments in the bond markets. This creates a glut of demand for mortgage-backed bonds (that are mostly insured by the federal government) and it means mortgage rates for homeowners drop.
While there are many factors that will impact a mortgage rate including loan amount, property type, loan to value and credit scores, it is quite possible now to get a 30-year fixed loan for less than $417,000 for less than 4 percent with little if any closing costs.
Adjustable rate loans that are fixed for five to seven years are in the 3 percent range. An increasingly popular program is the 10-year fixed, which is a loan with a fixed rate that will generally save you a little bit every month for a 30-year fixed period. These days, few people stay in their homes or their loans for more than 10 years, and a little every month can add up.
Decision to refinance
Homeowners need to do some thinking and some math when making a decision to refinance. Rate is not the only consideration; every loan comes with some closing costs. Mortgage brokers generally have a different business model commercial banks and can offer some interesting options.
For example, as a broker, I get paid by the lender when I deliver the closed loan. As a result, the lender will offer the borrower various options in terms of rate and what is known as a lender credit. A lender credit is a tax free cash credit to the borrower based on the rate the borrower chooses. The credit is applied against closing costs and prepaid escrows. In some cases this can wipe all or some of the cost of the refinance.
Hard and soft costs
Loan closing costs involve hard and soft costs. The hard costs include items such as the appraisal, title work, filing fees and underwriting fees.
Soft costs are items such as opening escrows for taxes and insurance or paying interest in advance for the month of closing. Soft costs are out there regardless of whether you refinance or not. You’re going to pay the taxes, insurance and daily interest one way or another.
When doing the math about the cost of a refinance, be sure to factor in the lender credits against the hard costs and don’t worry so much about the soft costs. Also take a good look at how long you plan to stay in the house and work that into the mix.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.
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