Unless you have been under a rock for the last 10 days, you know that the stock market has tanked. You probably also know that mortgage rates have come down. The typical rule of thumb is that when the stock market declines, there is a flight to safety to bonds and that causes mortgage rates to go down. Talk about the definition of mixed emotions! We are seeing 30 year fixed rates at about 4.125% for a conforming loan and 4.875% for a jumbo. Adjustable rate mortgage are just at obscene numbers. 5 year ARMs in the low 3% range and in some cases, below 3%. Even a 10 year ARM is at 4%.
Several months ago, we actually saw the 30 year fixed below that at 4% and it was always my contention that if it ever hit 4%, there would be a massive refinance boom in which the whole world would take lower rates and put money in their pocket. Well, I was wrong on that one. I will explain that in a bit. Some thought the purchase market would take off and get those that were on the fence, off it. I thought that to be total hogwash and on that one I turned out to be right. My feeling was and is that people prioritize what's important. Will I have my job in 3 months? Will I get a bonus this year? How will I pay for my kids college education? A lower interest rate simply is not enough incentive to overtake the other questions and jump in and buy.
Let's get back to the qyuestion as to why people didnt refinance when the rates hit 4%. I think the answers may tell us why it might not happen again:
1. Much tougher underwriting guidelines knocked many out of the box. Although the financial pedigree may be good, there is a line the banks will no longer cross and too many people were sitting on that line.
2. Many people already had rates in the low to mid 5's because they either bought when rates were really good or they refinanced between 2002 and 2004 when the rates were just as good.
3. Declining home values knocked so many people out of the box. Think about it simply. Many, many people bought their homes with 20% or less as a down payment. Now, values are down 20% to 30% in some cases through no fault of their own. So you start the refinance application and when the house is reappraised, you are hit with a lighting bolt. The house you bought in 2006 for $600,000 with a mortgage of $480,000 is now valued at $500,000. Your loan to value just went from 80% to 96%. That's when you get a disturbing phone call from your loan officer telling you that the loan won't close.
4. Condominium and co op building approval guidelines have gotten much tougher. I can't tell you how many people I turned away because I couldnt even take them back to the same bank only months after the purchase. The argument that they would use with me was sound-"I don't understand. The bank did my loan and approved the building 6 months ago. Why in the world would they say no now?" It wasnt even a question of being qualified because they all were. It was that the building no longer met the guidelines.
So where will rates go? Will they go below 4%? Don't know but I am getting a lot of inquiries. Here is the best advice I can give when rates start to plummet:
- Don't have paralysis by analysis. If you like the rate you are quoted, take it. Overanalyzing will do you no good.
- Don't get greedy. You may wait because you think rates will continue to fall but you are taking a risk.
- Be prepared to strike at a moments notice. If you are interested in refinancing, contact your loan officer and ask them to prepare a package for you ahead of time.
- Getting loans to the bank and closed is much more laborious than it used to be. Be prepared to be efficient but have patience once the loan is submitted.
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