Even though the Federal Reserve raised rates a quarter of a percentage point in December, interest rates have recently fallen on 30-year fixed-rate mortgages to lows between 3.74 and 3.83 percent, according to the Mortgage Bankers Association. That’s resulted in a surge of mortgage loan applications as of late.
Between the first week and the second week of February, the number of mortgage loan applications rose a seasonally adjusted 8.2 percent. Refinance applications made up the majority of the total applications.
“Refinance applications are extremely sensitive to rates,” said Mike Fratantoni, chief economist for the MBA, in an article on Realtor.com.
“With rates falling to their lowest level in over a year, there is no surprise that refinance applications would increase.”
So, why are interest rates dropping after the Federal Reserve raised rates? Rates drop when there is economic uncertainty and investors decide to sell riskier stocks and buy safer bonds. When bond prices rise, bond yields, or interest rates, drop.
But, this isn’t the only factor that affects interest rates, according to an article published on Zillow. Refinances also depend on how much someone owes on their home (versus what it’s worth), the applicant’s income stability, and lender guidelines. The article also states that right now the U.S. economy is more supportive of refinances because home prices have stabilized or are increasing, income is trending up, inflation is relatively low, and lenders are more flexible.
That begs the question: Should you refinance?
Not necessarily. Although you could save a few dollars every month, you may end up paying more in the long run. Closing costs for a refinancing vary in every city and state and depend on the price and size of the loan. In some extreme cases, refinancing costs could eat up any potential savings. You do have the option to do a no-cost refinance, but the rate will be slightly higher.
If you plan on moving in the near future, a refinance may not make sense for the same reason—you’ll lose whatever money you pay in closing costs.
Also, there’s no guarantee that if you start the process now, the rates will still be as low by the time your refinance closes.
“Consumers who think they might want to take their chances should always make a game plan with their mortgage professional of choice and understand that lenders can change rates before they have time to lock,” according to Matthew Graham, chief operating officer of Mortgage News Daily in the Realtor.com article. In fact, he says he’s already seeing interest rates start to rise.
Refinancing can be a bit of a gamble since rates change daily. What happens if you start the process and lock your rate and then rates drop again? Most lenders have renegotiation policies that allow you to benefit from part of that drop. For example, if rates dropped .25 percent after your rate lock commitment, typical renegotiation policies would allow you to drop your locked rate by .125 percent.
Unfortunately, lower interest rates have not had a significant impact on home buyers. Mortgage applications for new home sales actually fell 4 percent during the same period that refinance applications were on the rise, CNBC reports. The article points out that homebuyers are not as sensitive to weekly moves in interest rates since they tend to lock their rates in advance.
It's always wise to speak with a lender if you have questions about refinancing. In the meantime, our blog is here to keep you up to date with the latest in Scottsdale real estate news, economic and otherwise.
