How far will mortgage rates drop
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Lee Huffman decided in early December to refinance his mortgage after five straight weeks of declining rates.
But before the deal closed, rates fell again, cutting perhaps a quarter-point more from the loan package he’s getting for his two-story Anaheim Hills house.
It will be the third time in four years the 39-year-old bank vice president has refinanced. Not only will the new loans reduce his house payment by $170 a month, they also will decrease his debt at a faster rate while boosting income tax deductions.
“I look at it as a win three different ways,” said Huffman. “If I can find a way to reduce my costs – as long as it doesn’t take too much effort – I’ll find a way to jump on it.”
These days, borrowers are jumping on mortgage opportunities in droves.
Applications to refinance home loans jumped 66 percent nationwide last week from the week before to the highest level since July 2013, the Mortgage Bankers Association reported Wednesday. Home purchase loan applications rose 24 percent.
A renewed decline of mortgage rates has followed on the heels of a drop in benchmark U.S. Treasury yields.
Investors have been flocking to the safety of the U.S. government bond market amid growing concern about an economic slowdown in Europe and China and the effects of falling oil prices. As a result, interest rates on the 10-year Treasury note – to which mortgage rates are closely tied – fell below 2 percent last week for the first time since May 2013.
“Weakness abroad and tumbling oil prices have led to further declines in longer-term interest rates,” said MBA’s Chief Economist Mike Fratantoni.
The surge also is occurring here.
“I’m overwhelmed,” said Laguna Niguel mortgage broker Jeff Lazerson.
“We are so crazy busy with loans, both with purchase (loans) and refi-mania all over again. I’ve hired one additional processor, and I’m looking to hire another,” he said.
Lazerson estimated that 40 percent of his business in the past few weeks has been refinancings, compared with a normal rate of 20 to 25 percent.
LoanDepot CEO Anthony Hsieh said his Foothill Ranch mortgage firm did a record amount of business last week, with more than $300 million worth of loans – both for home purchases and refinancings – issued daily. That’s about 30 percent higher than normal.
“Since interest rates started to rally, we’ve seen a definite push-up in business, more specifically after the holidays,” Hsieh said. “Interest rates are dipping to the point where it allows the serial refinancer to enter the market.”
A year ago, industry groups predicted the average rate for a 30-year fixed mortgage would be at or above 5 percent by the end of 2014. But after peaking at 4.53 percent in January, the Freddie Mac average fell continuously through 2014, dropping to 3.73 percent last week.
That 80-basis point drop amounts to a savings of $194 per month on a conforming $417,000 loan.
To get an idea how rare today’s rates are, Freddie Mac has reported weekly averages below 4 percent just 94 times in the past 43 years.
The average for that period: 8.45 percent.
“This is a late Christmas gift for everybody,” Al Hensling, president and CEO of United American Mortgage, said of the drop. The decrease was “completely unexpected,” he added.
Even though a large number of homeowners scooped up similar rates during the refi boom of 2011-13, plenty of borrowers can still benefit from today’s rates, several mortgage brokers said.
Borrowers who refinanced as recently as six months ago are coming back to refinance again, said Hensling.
Lenders and brokers said it’s worth it to refinance if you can get a decrease of one-fourth to three-eighths of a point off your mortgage using a no-cost loan.
Your rate is even lower if you pay fees or points upfront, with lower payments offsetting those costs in as little as two or three years.
For example, the Freddie Mac average fell 0.4 percent in the past six months. Assuming your fees and closing costs on a $417,000 loan total $2,500, it would take just over two years for the savings to equal that amount.
Joe Tomkinson, CEO of Irvine-based Impac Mortgage Holdings, said his firm’s loan volume has been going up almost every month, with about 60 percent of his recent business in refinancing existing loans. He projected that rates may stay low until late this year.
“It’ll be a very profitable year for us,” Tomkinson said. “Where are you going to see interest rates at 33/4 percent or even at 4 percent?”
Not everyone should refi. If your mortgage has a prepayment penalty, you’ve had your mortgage for a long time or you plan to move within the next few years, you should not refinance your loan.
Nor is everyone benefiting from refi-mania, Lazerson said.
Servicers who rely on existing loans as their income source lose that income when loans get paid off early.
Brokers and originating mortgage companies also may have to repay fees on loans that are refinanced within six months – the minimum time required to justify those fees.
But the rate drop is good news for Huffman. The Anaheim Hills borrower not only is lowering his overall payment, he’s also able to shed two undesirable loans for better ones.
His current first mortgage is an FHA-backed loan, which requires a mortgage insurance premium that boosts his “effective” interest rate by 1.35 percent. That additional payment is not tax-deductible.
His second is an interest-only home equity line of credit.
He now qualifies for a conventional first mortgage without mortgage insurance, and all his interest payments will be tax-deductible. His new second loan will be “amortizing,” which means that a portion of each monthly payment goes to paying down the debt.
The timing is also great for Huffman and his wife, Anna, who is pregnant with their second child. Soon, the couple will have two in day care, instead of just their 3-year-old son.
“I think it’s great for people like me who bought in at a higher rate,” he said. “The savings will come in handy with the upcoming expense of our new baby girl due in March.”
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