DON’T LOOK WHERE YOU DON’T WANT TO GO Are you familiar with the idea that we tend to attract more of what we focus on? Here’s a great story that perfectly illustrates this concept.
It took a long week for U.S. consumers to fully wake up to the lower rates that followed Britain’s vote to leave the European Union. But now that they have, they’re beating a path to mortgage lenders’ doors.
Mortgage applications surged 14% last week to their highest level in more than three years. Applications of almost every type rose dramatically against the backdrop of rates that are at their lowest point in over three years.
The weekly data from the Mortgage Bankers Association confirm that lower rates are indeed driving a huge increase in applications this summer compared with last summer. The index tracking all mortgage applications is up 64% on a year-over-year basis. Purchase applications are up 29% from last year, while refinance applications are up a whopping 94%.
Last week, the average 30-year conforming rate on applications was 3.66%—and that’s a figure we haven’t seen since May 2013. That weekly average is 9 basis points lower than it was the week before the Brexit vote on June 23, and it continues to trend down daily. (One basis point equals 0.01 percentage point.)
The average 30-year jumbo was 3.73%, which is probably the lowest it has ever been (MBA didn’t start tracking jumbo rates until 2011).
If you haven’t acted yet, don’t panic—mortgage rates are still trending lower. And lower. The average mortgage rate declined again on Tuesday, and the average 30-year fixed conforming rate offer is now under 3.4%.
So what does this mean to you? Well, these lower rates directly benefit purchasers and refinancers. And refinancers will have the upper hand with lenders as they generally take less time to process and represent less risk on average.
According to our analysis of year-to-date data through June from Optimal Blue (an enterprise lending software company), refinancers have higher FICO scores, lower debt-to-income ratios, and higher equity in their homes than purchasers. They also tend to be older and are twice as likely to have excellent credit.
Refinance applications represented 62% of mortgage activity last week. When mortgage rates were at their lowest levels in history in the fall and winter of 2012, refinancing consumed more than 80% of the mortgage market.
If you have an existing mortgage and didn’t happen to refinance in the second half of 2012 or early 2013, chances are good that you can snag a lower rate than you have today. Talk to a lender to determine if the financial math works in your favor. It just might.
But before you jump in, make sure you consider both the short-term and long-term impact.
For the near term, determine how long it will take you to recoup the cost of refinancing. For example, if it costs $2,000 to refinance (whether that’s out of your pocket or tacked on to your loan balance), figure out how many months it will take you to break even on that investment with a lower monthly payment.
An improvement of 50 basis points will lower your monthly payment by 6%. On a typical loan balance on a median-price home, that translates into a monthly savings of $56.74, so it will take just over 35 months to break even.
But also consider the longer term. If you refinance into a deal that’s longer than the remaining term on your existing mortgage, you could very well end up paying moreinterest over time, even though you’re paying less on a monthly basis.
Given the huge increase in activity, mortgage lenders and brokers will be very busy this summer. So be patient. But also be persistent.
Because here’s the reality check: We don’t know how low rates could go; nor do we know when they’ll bottom out and start to rise again. Given how rates have fallen, it is wise to start the refinance process soon.
Make it easier on everyone involved by gathering key documents such as your current pay stubs, recent bank statements, and the past two years of tax records.
And shop around. Rates, points, and closing costs can vary dramatically by lender, so it will be worth the effort to find the offer that gives you a low rate as well as lowest costs.