Rate drops could spur new refi mania

By JEFF LAZERSON / CONTRIBUTING COLUMNIST

1/15/2016

Oh my goodness! The stock market is tanking and the bond market is rallying. Translation: refi mania is upon us again.

Talk about déjà vu. It was almost exactly one year ago that I was writing to you about rates plunging. Here we are again. What else could you expect?

Let’s see, oil prices have gone from $100 a barrel to $30 a barrel – a 70 percent collapse. Many countries, particularly Middle-Eastern oil dependent countries, are vulnerable to economic collapse. It’s already a hornet’s nest in North Africa and Europe in terms of political leadership and turf wars. China has lost much of its momentum.

As a result, it’s the old flight to quality story. People from all over the world are putting money in U.S. treasury securities.

“The bond market rally in respect to the 10-year Treasury is a result of world-wide problems. (We are seeing) flight from risk to safety,” said Lynn Fisher, vice president of research and economics at the Mortgage Bankers Association.

On Dec. 30, the 10-year Treasury yield curve rate was 2.32 percent. As of early Thursday (my column deadline) the 10-year rate was 2.08 percent.

In terms of 30-year fixed mortgage rates, pick a rate, any rate. The cost of that loan is roughly 1.375 points cheaper in just over two weeks. On a $417,000 loan amount, that’s $5,733. Or, in terms of interest rate instead of paying points, you are 0.25 percent lower in rate now than you were on Dec. 30. Going from 3.75 to 3.5 percent means a $58 lower payment per month.

If you happen to be in escrow on a purchase application, and you’ve locked your rate in, some lenders will consider something called a float-down rate. What that means is if the market is better by at least 0.375 percent in points from the date you locked, they may give you a portion of the fee reduction – say 0.125 or 0.25 percent.

In defense of the lenders, it costs them money for these forward rate locks and their subsequent non-deliveries. That’s why they don’t give you a dollar for dollar reduction. Remember, you don’t have to lock your loan up front either. Your lender will honor the lock if rates worsen.

My advice is always lock your rate upfront – a bird in the hand. If rates improve, ask for a float-down.

For existing mortgages, is there an opportunity for you to take advantage of this rate downturn? Maybe.

In my experience most people will go through the application process if they can save $100 per month or more on a no-cost loan. If your rate is over 4 percent, I say start shopping. Today, the typical adjustable rate mortgage is very close in price to a fixed rate. So, I suggest you focus on fixed and the payment certainty.

If you have questions or comments, please contact Jeff Lazerson by clicking here.