Mortgage Refinance Rates
As we all know, rates are inching up. And while we know it is no where near time to panic, uninformed clients read these headlines and they can start to worry about buying that new home. What they don’t know is that there are options out there and one good loan candidate is Adjustable Rate Mortgages (ARMs). ARM loans are an invisible part of the mortgage marketplace, but maybe that’s about to change.
Since 2009 annual mortgage rates have been below 5 percent, and demand for adjustable-rate mortgages has been in the single digits. Ellie Mae reports that in December 2017, ARMs comprised just 5.6 percent of the marketplace, up from just 3.9 percent in November 2016.
The refinance pool, homeowners who could benefit from exchanging their old first mortgage lien for a new one, is shrinking fast. Black Knight says, in its March Mortgage Monitor, that the pool declined by 40 percent from the beginning of the year through February 15. This happened as the average rate for a 30-year fixed-rate mortgage (FRM), per Freddie Mac, increased by 43 basis points to 4.38 percent. Since then rates have risen more slowly; they closed out last week at 4.43 percent. These increases put the average rate back to levels last reached in the spring of 2014.
These increase means that approximately 1.4 million borrowers lost the interest rate incentive to refinance in just the first six weeks of 2018. This leaves 2.65 million candidates who could benefit and are likely to qualify for refinancing at the higher cost level, the smallest pool since late 2008, just before the initial decline in interest rates that followed the start of the housing crisis.
Sure, there are few financial products which are easier to understand or a better deal for borrowers than the plain fixed-rate mortgage. Get a fixed-rate mortgage (FRM) and your client is locked in a mortgage rate for as long as 30 years. They will have a hedge against inflation and higher mortgage rates.
Let’s throw out a scenario:
Say you financed during the first week of January 2018, you could get prime fixed-rate financing at 3.95 percent (according to Freddie Mac). Skip forward to mid-February, and the going rate was 4.38 percent. That’s a difference of .43 percent in just six weeks. If you have a $200,000 mortgage, that’s almost $860 in extra interest during the first year.
What can your clients do to keep monthly costs low?
One approach is simply to borrow less. As interest rates rise, home prices increases can slow, and – maybe – even decline.
According to Lawrence Yun, chief economist with the National Association of Realtors – each .10 percent mortgage rate increase reduces home sales by 35,000 units. Less demand can mean lower home prices, meaning clients may not need to borrow as much.
Alternatively, they may want to get off the comfy 30-year fixed bandwagon and search out other products.
For example, consider ARM financing. In mid-February, according to the Mortgage Bankers Association, conforming loans were priced at 4.57 percent. At the same time, 5/1 ARMs were priced at 3.74 percent.
For a $150,000 mortgage, an FRM borrower will pay $766.28 for monthly principal and interest. An ARM borrower will pay $693.82. That’s a difference of $72.46 a month, or $870 a year.
3 questions clients should ask when considering an ARM
Why do lenders offer an ARM discount? The issue is “interest rate risk.” If your client has a 4 percent fixed-rate mortgage, and market rates go up to 5 percent, the lender is “losing” 1 percent. Rates for an ARM can go up or down, and this protects lenders.
To make ARMs attractive, lenders offer three benefits for borrowers.
First, there is a lower introductory rate. With a 5/1 ARM, the starter rate lasts five years, and then the rate can move up or down.
Second, because the introductory rate is lower, it can be easier to qualify for financing.
Third, there are borrower protections built into ARMs. Such protections include annual and lifetime rate increase caps.
ARMs come with introductory periods ranging from three to ten years. In general, the shorter the initial fixed period, the lower the interest rate.
What’s better in 2018? A 5/1 ARM or 15-year fixed?
The reason to consider the length of ownership (what’s known as “tenure”) is that it can very much influence the ARM strategy.
- Freddie Mac says in the third quarter the typical loan was outstanding 6.1 years before refinancing.
- ATTOM Data Solutions says “U.S. homeowners who sold in the third quarter had owned an average of 8.19 years.”
- The typical 2017 seller, said the National Association of Realtors, “was in the home for 10 years before selling — matching the all-time high set both in 2014 and a year ago. Prior to 2009, sellers consistently lived in their home for a median of six years before selling.”
Of course every situation is different, and each client has needs specific to their lifestyle. We should work together to get them into the best program based on their situation. At Superior Mortgage Lending we are always available to answer client questions, run scenarios, and help you get them the best mortgage possible. Please contact us anytime (702) 507-4170. We are always here to help.