Mortgages

Mortgage Rates Drop: What to Know Before You Refinance

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According to the Mortgage Bankers Association, there has been a surge in mortgage refinance applications as homeowners try to take advantage of a recent drop in mortgage rates. The MBA reports that the average contract interest rate for 30-year fixed-rate mortgages decreased to 4.54 percent with .98 points for loans with a Loan-To-Value of 80% or less. The average contract interest rate for 15-year fixed-rate mortgages decreased to 3.66 percent, with points of 0.97 for loans with an 80% LTV. The effective rate is now at the lowest level since October 8, 2010.

Twice in my career I worked as a mortgage loan officer, and over the years I’ve heard all kinds of misconceptions about how mortgage rates work. I thought I would seize this opportunity to share a few tips I’ve picked up from interviewing Joe Kelly, president of ArcLoan.com, each week on my radio show Talk Credit Radio. (Along with Credit.com, his firm sponsors the program, and Joe shares tips in a weekly mortgage report.)

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Here are four things you should know about mortgage rates:

1. You can get just about any rate you want—if you are willing to pay for it.

While your first question to a mortgage company might be “What’s the rate?,” your second question should be, “What will that rate cost?” You can get practically any rate you want, explains Kelly, but it depends on how much you are willing to pay for it. On any given day there is a range of rates where customers pay 3 or 4 points to lenders in exchange for a lower rate, or where lenders give borrowers a credit toward closing costs in exchange for a higher rate.

My advice: Ask the loan officer to show you several options—with closing costs and without closing costs—and help you figure out what the “breakeven point” on your closing costs will be. In other words when will you recoup those costs and will you be in the home that long?

2. Rates aren’t affected by what you probably think they are.

Most people think that the Fed’s rates have the biggest effect on mortgage rates, but Kelly says that inflation fears have the biggest effect on long-term rates. The Fed’s rates have more impact on short-term rates.

And what goes on outside our borders can be just as important as what goes on within them. “We live in a worldwide economy,” says Joe Kelly, “and what happens around the world does affect our mortgage rates.” Case in point: Michael Fratantoni, MBA’s Vice President of Research and Economics, points to the “ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe” for recent drops in mortgage rates.

My advice: Stop trying to second-guess where rates are going. If rates are good and it makes sense financially to refinance, then just do it.

What to Know Before You Refinance (con’t.) »

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