Low refinance activity defies low interest rates

By Jeff Lazerson

9/15/17

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey: Still at the second lowest level since the presidential election, the 30-year fixed rate was unchanged from last week, remaining at 3.78 percent. Ditto for the 15-year fixed, also remaining at the same 3.08 rate that we saw last week.

The Mortgage Bankers Association reported a 9.9 percent increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $424,100 loan, last year’s rate of 3.50 percent and payment of $1,904 was $67 less than this week’s payment of $1,971.

What I see: Locally, well-qualified borrowers can get the following mortgages at zero points: A 15-year fixed at 3.0 percent, a 30-year fixed at 3.625 percent, a 5-year adjustable-rate mortgage at 2.875 percent, a 7-year adjustable-rate mortgage at 3.125 percent, a Federal Housing Authority or FHA 30-year fixed at 3.375 percent and a Veteran’s Administration or VA 30-year fixed at 3.5 percent, a 15-year agency high-balance ($424,100 to $636,150) at 3.25 percent, and a 30-year agency high-balance at 3.875 percent.

What I think: 

This is not normal consumer behavior, at least not in my experience. Rates are dipping down again, getting closer to pre-election rates. Yet, refinance activity is sparse.

“The share of refinance activity is at a 16-year low compared to purchase activity,” said Ben Graboske, Black Knight’s executive vice president of data analytics.

Refinancers were just 31 percent of all loan mortgage originations in the second quarter of 2017, according to Black Knight.

Crunching California numbers, Black Knight data indicates that approximately 545,000 California homeowners could be saving an average of $349 on their monthly mortgage payments if they refinance. Of those, there are 103,000 Californians who are paying, on average, $817 more per month than if they refinanced.

Mind boggling. Bushels of payment savings foregone each month, perhaps due to lack of borrower awareness. Or maybe, there is no time available to dedicate to this. Or, as one borrower succinctly said, he doesn’t want to go through another financial strip-search.

The Black Knight data assumes a zero-point loan, not a zero cost loan.

Let’s say that settlement charges for a zero point loan are, on average, $3,000. If you divide the average payment savings of $349 into the $3,000 cost, then you will recoup your settlement charges in less than 9 months. As long as you are keeping the property for at least one year or longer, the math says it makes sense to move on this.

One lender is now offering to pay the mortgage insurance on any conventional loan for borrowers with a 760 or higher credit score. So, on top of a possible interest rate and payment improvement, puff! The PMI goes away just like that.

Do you act now or will rates drop further? Will the devastation from hurricanes Harvey and Irma have any impact on the overall U.S. economy and by extension mortgage rates?

“Our latest forecast of mortgage rates remains around 4 percent through year end,” said Sean Becketti, chief economist at Freddie Mac. “Ultimately, mortgage rates are determined by U.S. and global investors in capital markets, not by local conditions in regional markets.”

For every month you wait, you lose a month of interest rate and payment savings. And you always risk the possible rise of interest rates. If rates drop further, you can always refinance again. Prepayment penalties are outlawed, at least on owner-occupied loans.

Beyond the Black Knight payment savings data, consider your own situation. Has your home appreciated to the point of pulling cash-out or getting rid of your second mortgage or PMI? Maybe it’s time to pull money out of the stock market and do a cash-in refinance.

Figure out what benefits, if any, there are by refinancing. Always shop around and compare loan estimates from at least three sources.

If you have questions or comments, please contact Jeff Lazerson by clicking here.