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How low will fixed-rate mortgages go?
As interest continues to fall, it may make sense to act sooner rather than later to refinance your loan.
By Jeff Lazerson
What I think: How low can rates go?
Just a few days ago, Bloomberg reported Danish homebuyers are being paid one-half point for a 10-year mortgage, pay no interest for a 20-year loan and are being charged just a half-point rate for a 30-year loan.
“Never say never,” said Mike Fratantoni, chief economist of the Mortgage Bankers Association when asked if the U.S. could see negative mortgage rates.
Today U.S. borrowers can get a 30-year fixed at 3.375% with just one point. A client of mine recently locked down 2.5% on a 15-year fixed by paying more than 2 points — the lowest rate I’ve ever locked in my 32 years as a mortgage broker.
We have a long ways to go before we get to zero mortgage interest rates. Because we don’t know how much lower rates are headed, let’s focus on the mortgage opportunities in front of us right now.
The current opportunities may be lower rates, shorter terms at even lower rates, consolidating debt with cheaper cash-out money and refinancing away from mortgage insurance.
The 30-year fixed is nearly one full percentage point lower than on Jan. 1, triggering a huge spike in refinancing and resulting in longer underwriting lines. As rates trend downward, many lenders are not posting lower rates proportionate to the improvement in the 10-year Treasury rates.
I point to the Freddie Mac 30-year mortgage rate averages that started Aug. 1 at 3.75%. This week, Freddie reported 3.55%, or 20 basis points lower. Yet the 10-year Treasury rate, which has a symbiotic relationship with 30-year fixed mortgages, fell 31 basis points from the start of the month, dropping to 1.59% from 1.90% on Aug. 1.
The Freddie rate lags 11 basis points in this three-week example.
Lenders are quicker to move mortgage rates higher on those bad bond market days than they are to post improved rates when the bond market rallies.
“Lenders have capacity constraints,” said Fratantoni.
Because lenders are slower to lower, you may be losing monthly payment savings for every additional month you wait. “Households that refinanced in the second quarter of 2019 will save an average of $1,700 a year, which is equivalent to about $140 each month,” said Sam Khater, Freddie Mac’s chief economist.
Just like gambling winnings, you can play with house money. Consider a no-cost refinance to improve your rate right now. Then, if rates drop again, do another no-cost loan at the lower rate.
Most borrowers are willing to go through the refinance “exercise” again and again if they can save $100 or more per month with each loan funding.
Be mindful that even though Dodd-Frank precludes prepayment penalties for owner-occupied loans, Fannie, Freddie and other upstream money suppliers will likely come after your lender or mortgage broker for advancing rebates to borrowers getting zero-cost or even zero-point loans that were paid off in less than six months.
Jeff Lazerson - Mortgage Columnist since 2011