Assessing impacts of falling mortgage rates

Since Treasury announced a $600 Billion effort to buy Fannie and Freddie mortgage-backed securities and the Federal Reserve dropped the federal funds target rate, mortgage rates have dropped like a stone to levels not seen since the 1960’s. This past week saw occasions where conventional mortgage rates were below 5% and FHA rates were in the low 5’s. Refinancing spiked on the news as many lenders and title companies I’ve talked to indicate a definite uptick in activity.

If you are thinking of refinancing a mortgage or even buying a home, here are some things to consider:

• Forget the “rules of thumb” that say it’s time to refinance when rates are 1 or 2 points below your current rate.

The fact is it takes a little calculating to determine if refinancing makes sense for you. Check with two or three lenders to see what they can offer you for a monthly payment and expected closing costs. If the amount you save per month will pay for the closing costs within the time you anticipate living in the home, then you may want to consider refinancing.

Another perspective on refinancing – can you shorten the term of your mortgage and keep your payments the same?

• Not everyone will get to benefit.

The rates being touted in news and advertising are typically for conventional loans with 20% equity and a credit score of 720. FHA rates are quite good and don’t have the same stringent criteria, but you still need a solid score for the best rates (also, FHA cash out refis are available up to 95% of the home’s current value). Additionally, rates on Jumbo mortgages (those above $417,500) have not fallen like conventional rates.

If you are looking for an investment property loan? Good luck. That is one area where the credit spigot seems close to being shut off. While it is still possible to get an investment property loan, the restrictions are pretty onerous. Some of the issues you might encounter include: no more than 75% of the property value, no cash out refinancing, no more than 4 investment property mortgages, and no financing of properties less than $125,000. Different lenders may have different restrictions, but expect to meet resistance in one form or another.

• Don’t postpone simply because you think rates will go lower.

This is like trying to time the bottom in the stock market. The people who get in at the absolute bottom usually do so with a certain amount of luck. Those who wait usually just end up missing it. Some have seen news reports that the government will try to push rates to 4.5%, but keep in mind that this is not a given AND the fine print is that this will likely be only for new owner-occupied purchases.

• Lower rates increase affordability

Aside from high inventory levels, home prices fell in large part because affordability had risen to unsustainable levels. Mortgage rates at these lower levels mean more people can qualify to purchase a home (or more than they originally thought they could afford). This is undoubtedly one of the effects the government is seeking to help stabilize home prices. Although the Cincinnati area hasn’t been impacted by falling prices to the extent that other areas have seen, you could reasonably expect to see increased competition for the best of available properties on the market.

Bottom line –

This is a time of unprecedented opportunity if you are in a position to take advantage of lower rates and the large inventory of homes in the market. Take the time to do your due diligence to determine if refinancing or purchasing a new home makes sense for you now.

If you’d like additional information on lender resources, market conditions in your neighborhood, or other real estate questions, feel free to contact me via e-mail or phone.