Is Now The Time To Refinance?

by Peter G. Miller
December 8th, 2008

Swooning interest rates in the past few weeks have caused lender phone lines to light up nationwide. If you haven’t refinanced in the past few years, today’s rates are incredibly attractive and reason enough to speak with lenders.

What’s not generally recognized is that today’s interest levels are astonishing low by historic standards. Last week, for example, Freddie Mac reported that you could get a crisp, new 30-year fixed-rate mortgage for 5.53 percent with .7 points.

“After Federal Reserve actions to increase liquidity in the mortgage market, interest rates for fixed-rate mortgages (FRMs) took a dive,” says Frank Nothaft, Freddie Mac vice president and chief economist. “This week’s decline was the largest since the week of November 27th, 1981, and 30-year FRM rates are now almost a full percentage point lower since the last week in October.

“The recent plunge in rates contributed to the nearly 150 percent jump in conventional mortgage applications over the Thanksgiving week, led by almost a 300 percent surge in refinances, according to the Mortgage Bankers Association. Roughly three out of four mortgage applications were for refinance transactions, up from around half during the prior week,” he said.

You can also get an adjustable-rate mortgage and do even better — at least at first. Freddie Mac says that “five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.77 percent this week, with an average 0.6 point, down from last week when it averaged 5.86 percent. A year ago, the 5-year ARM averaged 5.75 percent.”

These rates raise several thoughts:

First, a fixed-rate loan at 5.53 plus .7 points has an APR over 30 years of 5.59 percent. An ARM at 5.77 percent plus .6 points has an APR of 5.83. In other words, the “benefit” of an ARM in today’s marketplace is a savings of just 24 basis points, one-quarter of a percent. And what do you get in exchange for that minuscule up-front discount? You get the possibility of vastly higher rates in the future.

Second, because there is little price difference between fixed and adjustable rates, there is little advantage in terms of qualification standards with an ARM then in the past when ARM start rates were substantially below fixed-rate levels.

Third, rates may go down in the near-term. The reason that rates are so low today is that Washington is said to be considering a plan which would make home loans available at 4.5 percent. Were such loans to become widespread mortgage rates would have to drop for all mortgage products.

FHA mortgages, VA financing and fixed-rate conventional loans remain the gold standard of home finance. Anything that looks or smells like an “affordability” mortgage product should be avoided. You’ll pay less up front with such mortgages but you may well be foreclosed when teaser periods end.

The bottom line: See what Washington does in the next few days. If 4.5 percent mortgages become real then now would be a wonderfully-good time to chat with lenders — especially those who offer fixed-rate FHA financing.

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This entry was posted on Monday, December 8th, 2008 at 3:11 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

2 Responses to “Is Now The Time To Refinance?”

  1. Brian LeBars Says:

    Low rates are definitely attractive right now. The problem we are having in the Bay Area are housing values. Even if rates were to continue lower many homeowners are still unable to refinance. Hopefully FHA will help put a “floor” in the market.


  2. John Storo Says:

    I got a call from my mortgage broker with Sempfi this morning. He had a 4.5%, 30 year fixed FHA loan with no points. No lock fee either. The company is based in Providence RI. Their website is http://www.sempfi.com.

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