By Robert Nusgart
The Daily Record Newswire
OK, so I was wrong.
Everything in the first quarter of the year pointed to a slow rise in mortgage rates. It looked as if you hadn’t taken advantage of the refinance craze in the spring of 2009, when rates for a 30-year fixed rate mortgage touched 4.75 percent, then you could forget it.
The Federal Reserve’s program of buying mortgage-backed securities was coming to an end in March, and the economy was showing some signs of a heartbeat. Talk had already begun on just when the Fed would start targeting a rise in interest rates.
But then came Greece and its economic problems. Then came worries about the foundering euro and about a housing bubble in China.
In June, the jobless report showed that only 11,000 private sector jobs were created in May. Not so good.
Now comes the hangover from the expiration of the federal housing tax credits. In May, new home sales plunged 33 percent — the largest monthly drop on record.
Oh yes, there was the daily coverage of oil liberally gushing into the Gulf of Mexico, spoiling the Gulf Coast region, depressing the livelihoods of the people of that area.
Take all of that into consideration over the last 60 days and what you get is a Consumer Confidence Index that came in at 52.9 in June, falling from 62.7 in May, according to the Conference Board. It was the biggest drop since February.
Digest all this woeful news and what would you expect? The stock market swoons and investors look for the safest place to put money. The international community, fearful of the European economies, looks for a flight to safety. And where is that: good old U.S. Treasuries.
So much money came into the Treasuries that the yield for the 10-year bond — an indicator for how mortgage rates typically will behave — last week dropped to its lowest point (2.94 percent) since April 2009.
Dropped like a rock
And where did mortgage rates go? They dropped like a rock.
The Mortgage Bankers Association reported that applications for new mortgages rose 9 percent over the previous week. Within that number, 77 percent were for refinancing as homeowners who may have missed out a year ago were able to get a second chance — and even those who did refinance were able to modify their rates downward again.
Rates for just about every kind of mortgage were hitting their historic lows.
You could get a 30-year conventional fixed rate below 4.5 percent.
If your situation was more short term, you could jump into a five-year adjustable rate mortgage for a point less at around 3.5 percent.
With this kind of cheap money available, anyone thinking of using cash to purchase a home should think again — especially since this money comes with the benefit of interest deduction.
So does it make sense to re-examine your mortgage even if you just refinanced 12 to 18 months ago? To determine, use two simple criteria: Do the numbers make sense and what do you want the mortgage to do for you?
The best strategy for a borrower who has recently refinanced and wants to take advantage of these low rates is to work with a mortgage professional who can lower your rate and monthly payment, while attempting to keep your new loan amount near its current level.
That is typically achieved by a loan officer not using the lowest rate possible, but finding a happy medium between a lower rate than what the borrower has and then combining that with a lender credit that will absorb all or most of the costs from the mortgage company, appraisal and title company.
Points in reverse
It’s almost like using points in reverse.
When borrowers seek a lower rate, they can buy it down by paying points.
Using a higher rate will generate what is called premium pricing, which then can be passed on to the borrower as a credit to cover the costs of the transaction.
Let’s say a person has a $400,000 mortgage, with a current rate is 5.125 percent and principal and interest payment of $2,177. Now let’s say the individual gets an offer to move the rate to 4.75 percent — maybe not the lowest it can be, but it would come with a lender credit of 0.75 percent of the loan amount — $3,000.
The new principal and interest payment would drop to $2,056, a savings of $121 a month, and the $3,000 should cover the majority of the mortgage and title company costs.
The borrower would still have to re-establish the escrow account for taxes and insurance, meaning that he or she would most likely have to come to the settlement table with those monies. But it can be thought of in the following way: When refinancing, a borrower usually does not make a payment on the first of the month following the refinance. Now, think of it as instead of skipping that month, you will just be making what would have been your regular mortgage payment at the settlement table. And remember, that borrower will get rebated back whatever is remaining in his or her current escrow account.
The bottom line here is that your mortgage is a financial tool — for better or worse. There is an opportunity right now with rates this low to see if you can lower your monthly payment, or move from a 30-year mortgage to a 20-year or even a 15-year term, without tremendously affecting your family budget.
And again, if it makes sense — do it. If not, and if in doubt, then don’t.
Robert Nusgart is a loan officer with Prospect Mortgage LLC, which is associated with The Strata Group in Baltimore. He can be reached at (443) 632-0858 or by email at Robert.Nusgart@prospectmtg.com.
