August Refi Boom: Consumer Tips

Rates were dropping this time last year as Europe’s debt crisis and U.S. economic weakness led to a second round of quantitative easing. NY Fed president Bill Dudley confirmed QE2 in an October 1, 2010 speech, and rates hit an all-time record low October 9.

Market theory during the debt ceiling debate was that, once a deal was reached, rates would rise slightly as bonds sold and stocks rallied. But then we got Friday’s grim GDP report showing 1.3% economic growth for Q2 and Q1 was cut drastically to 0.4%. Manufacturing reports confirm slowing activity, the debt deal does nothing to support growth, and yes: Europe is still a problem. So rates are dropping, and there’s opportunity to refinance. Here’s a refi roadmap for you.

Borrower AND Property Must Qualify: The temptation is to rush to lock a rate when you see rates dropping. First, you need to make sure your income, credit and asset profile still works in today’s very strict underwriting environment. Then you need to make sure there’s enough equity in your home to refinance. Due to appraisal rules that prevent loan agents from pre-screening value estimates with appraisers, you usually have to pay for an appraisal up front to find out the value of your home so you can calculate if you have sufficient equity. If you have a second mortgage, the second mortgage holder must agree to ‘subordinate’ behind a new first mortgage before the new mortgage can close. And if you’re in a condo, the condo building must have at least 51% owner-occupancy, a healthy budget with no (or at least well-explained and documented) special assessments, no litigation, no single owner holding more than 10% of units, and no more than 20% commercial space (or 25% for FHA).

Your Rate vs. Headline Rates: Tomorrow the press will be littered with ‘record low’ rate headlines because every Thursday Freddie Mac publishes a rate survey from the previous week. This is source material for virtually all media. There’s lots of fine print the headlines don’t catch including that those rates are only for loans to $417k, single family homes only, owner-occupied only, and most of those loans have .7% to .8% in points (aka extra fees). Here’s how to decipher fine print in rate stories. The rest is a function of you getting quotes from a mortgage lender based on your own profile.

Locking A Rate Is Like Buying A Stock: When you lock a rate, you’re setting that rate then the market will go up or down. It’s very much like buying a stock. The main difference is that lenders have what they call ‘renegotiation’ policies if rates drop after you’ve locked. All renegotiation policies are similar in that rates have to drop meaningfully for you to be able to capture some of that drop after you’ve already locked a rate. Bottom line: renegotiations don’t let you capture the entire gain because you’ve already made a commitment. So as an example, if you locked a rate at 4.75% and the quoted rate for that same unlocked loan a week later dropped to 4.5%, most lender renegotiation policies will give you half of the gain which would put you at 4.625%. Here’s more on why Locking A Rate Is Like Buying A Stock.

How To Choose Cost vs. No-Cost Refi: In the current globally unstable economic environment, rates are very volatile. The trend as of now suggests rates could drop a bit more if the U.S. and non-U.S. situations became weaker still. So you can either wait and bet on your theory that rates might drop more, or you can lock a rate and capture it now. The latter is advisable since we’re now very close to all-time record lows (rate chart linked in paragraph 1), and usually bond markets that rates are derived from correct when they reach these levels. If you do lock, one way to hedge your risk is with a no-cost refinance. This is where the lender covers all your closing costs. The way lenders do this is by offering a slightly higher rate that enables them to apply fees derived from that higher rate to cover your closing costs–which range from $2500-$4500 depending on your market, the price of your home, and the amount of your loan. If you take a no-cost deal and rates drop again, it makes it easier for you to do another refinance because you didn’t spend any money on closing costs for the first one. Ask your lender to talk you through this math.

Where Do Rate Markets Go From Here: The next huge economic indicator is this Friday’s BLS July jobs report. If it’s as dismal as June’s report, it will confirm the market’s theory of the past week that things are getting worse. Mortgage bonds would rally more, and rates would drop more. But any remote sign of good news from that jobs report would have the reverse impact. More on this tomorrow. Stay tuned.