Don't Be Late on Your Record Rate!

Don't Wait Until It's Too Late to Lock Your Record Rate! (edit/delete)

Let's face it, everyone wants to get the best deal out there. We want to get that house at the bargain basement price, we want to buy the car after making the car dealer say "mercy", and we all want the VERY lowest possible rates on our mortgage. For the past 5 years, with the exception of a few brief moments, mortgage rates have generally been in the high 5's to high 6's. When rates went down into the 4's a couple of weeks ago, many people jumped on the opportunity to get an unprecendented rate on their home loan. However, there were probably just as many people who waited and decided not to lock in hopes of scoring an even lower than record rate on their loan.

More than one person asked me if rates were going below 4.5%.
A few weeks ago, in his annual market review and prediction article, Barry Habib of Mortgage Market Guide mentioned that rates for 2009 would range from 4.5% to 5.5%. As I write this post, rates are generally 5%-5.25%, up from 4.5%-4.75% two weeks ago. I've got a whole list of clients waiting for rates to hit 4.5% again before they lock. My feeling is that they may not get the 4.5% they are looking for, but they very possibly will be able to get an opportunity to lock in the upper 4's in the coming weeks.

For a number of reasons, these rates will not stay at these ultra-low levels for an extended period of time. Some of the reasons include:

1) Inflation Inflation is the arch-enemy of bonds, including mortgage-backed securities. While there is no apparent inflation in today's economy, the busy driving season and the influx of cash by the government will likely cause inflationary pressures heading into the summer months. Even the hint of inflation will be enough to eat away at the price of bonds, sending home loan rates upward.

2) Lender Volume Levels Virtually every lender in the country cut staffing levels this past fall. Couple that with mortgage applications that are up nearly 400% and you have a situation where it is nearly impossible to keep up with the demand. In order to slow down the demand on their systems, lenders are artificially charging mortgage rates higher than the market would normally permit. If mortgage rates are generally 4.75%, and a lender can charge 5% and be at full capacity, they are going to charge the higher rate.

3) Less Competition The mortgage industry is definitely in a transitional period. In 2009 you will see less and less mortgage brokers and indirect lenders in favor of direct retail mortgage banks. The government regulators are encouraging more and more lenders to eliminate wholesale mortgage operations in lieu of direct lending. This in and of itself will cause rates to be slightly higher as mortgage lenders try to keep up with demand and strains on the system as mentioned in #2 by charging slightly higher rates.

4) Risk-Based Pricing Fannie Mae and Freddie Mac are now very much involved with pricing that is tied to borrower's credit scores. A client with a 650 credit score is now looking at a rate 1/2% higher now than they would have gotten a year ago. In fact, any borrower with less than a 720 credit score is penalized with higher rates on conventional loans. Also, PMI companies are MUCH more restrictive with the loans they are insuring and charging premiums that are higher than ever. If this trend continues, it will become more and more expensive for borrowers to obtain financing at good rates.

5) Federal Government Buying Bonds - The federal government is the main reason we are seeing rates as low as 4.5% in the recent cycle because they are buying up to $500 Billion in mortgage bonds. When the federal government STOPS buying mortgage-backed securities, we will see mortgage rates automatically increase. How much of an increase, we don't know.

6) The Market The mortgage rates are at record levels. NOTHING stays at record levels forever. When housing and the economy regain momentum (and they will), you will see rates much higher than they are currently. This is simply a market principle.

In an earlier blog post, I showed the savings of refinancing a loan to from 6.5% to 5%. The payment savings and interest saved over time is mind boggling. The bottom line is this:

If you are likely going to stay in your home for another 5 year or more, it will make sense for you to refinance if you can lower your interest rate by at least 1%.

If you are going to stay in your home 3-5 years, it MIGHT make sense to refinance if you can lower your rate by at least 1.5%.

If you are going to be in your home less than 3 years, you will likely not have time to recover the closing costs it takes to refinance.

Don't let a perfect rate get in the way of great rate. I assure you, there will be consumers around the country who will be stuck paying a rate over 6% who could have gotten 5%, but wanted 4.25%. Take your profits when you can get them; lock in within a 1/4% of the all time low rates; and count the thousands of dollars you will save over the life of your loan.