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 Here are the rest of the last week's comments and the days that affected rates most lately....... The Week in Review..... Highest Rates since 7/1/2004 October 24 PPI follows the lead of last week's CPI with highest reading in 25 years..... October 18 The Week in Review - The buzzword is Inflation.... October 9 Hold on to your Hats, rates will be going up..... October 3 Greenspan worries about "exotic" mortgage instruments..... September 26 |
Time to Refinance that ARM?..... The week in review November 7 7:24 AM EST Mortgage rates took another hit this week and both the rates and the Treasury Bond are teetering on breaking through to new highs on the yield curve for 2005. Rates climbed another 1/8%, and the ARM's continue to creep up on fixed rates with as little as a 1/4% difference between a 3 year ARM and a 30 year fixed rate mortgage. Todays' article explores Mr Greenspan's visit to congress and a real life comparison of keeping an ARM versus waiting to refinance at higher rates in a year or two. Economic Events this week The big news of the week was Alan Greenspans last visit to the Joint Economic Comittee prior to his retirement and replacement by Ben Bernanke and the markets looked for one last pearl of wisdom from the chairman of the Fed. Other than this appearance, very little other news impacted mortgage rates this week. During the last 18 years, Mr Greenspan has made a point of using words that make you run to a dictionary or being so unclear that he has forced the market to make up it's own mind on where the economy has gone, but this trip was different. He was very clear that inflation is "Uncertain" in the near future and left the door wide open for more rate hikes. While the "experts" debate whether this means that the Fed is headed towards 4.5% or 5.5% from the current 4% Fed funds rate, one thing is certain, rates will continue to go up. Translated into mortgage rate terms, this means that the current prime rate of 7% will climb to somewhere between 7.5% and 8.5%. Adjustable rates will also increase along with the Fed's rate hikes. Is it time to refinance that ARM? This leads us to those of you that are trying to decide whether to get out of that ARM that you took in the past few years. Most borrowers who secured a 3,5 or even 7 year ARM during the past 3 or 4 years have a rate that has been down in the low 5's or better and it is obviously hard to sign up for a fixed rate mortgage that will increase your payment when you sign up for a rate that is at 6.25%, but take a close look at the agreement that you signed. Even though you may still have one or two years to go on that ARM, you should take the time to call your mortgage professional and have them help you do a cost comparison over the long term. Saving money for two years when you intend to stay in your home for 10 more years may be outweighed by what you will pay for the other 8 years. Although 6.25% may sound like a high rate compared to what we have seen over the last 3 years, historically this is still a very good rate. I can remember back in 2002 how excited people were to be able to refinance with a rate in the 6's and the rush to refinance that occurred when rates were at 6.875% The perception of what is a good rate is all relative and drives many borrowers to make snap decisions, but the borrowers who end up ahead in the long run are the ones who take the time to make an educated decision and explore their options. An example to show you why......... Let's take a borrower who has a $200,000 mortgage at 5% on an ARM. The current P&I mortgage payment would be $1,073.64 At 6.25% the payment would now be $1,231.43 The increase is $157.79 per month. If the rates were to go up another 1.5% due to inflation and increases by the Fed or other factors, then the rate for a 30 year fixed would be at 7.75% and the payment would be $1,432.82 Let's assume that you will stay 10 years in your home........ If you refinance now, you have 120 payments of $1,231.42 or total payments of $147,770.40 If you stay in the ARM for 2 years to save money at the 5% and then have to refinance at a higher rate of 7.75% here is the total you would pay....... 24 payments (2 years) at $1,073.64 or a total of $25,767.36 and 96 payments (8 years) at $1,432.82 or a total of $137,550.72 Waiting to refinance could cost a total of $163,318.80!! This is $15,547.68 more than refinancing at today's rates. A savings of $1,555 a year or a savings of $129 a month versus waiting. Of course, this is assuming that rates are going higher than they are now and assuming that the borrower will stay in the home for ten years, but the bottom line is that many borrowers in ARM's will end up paying more by waiting. Many borrowers will look at the immediate cost of paying $159 a month now rather than looking at the long term savings. This short term approach is going to cost a lot of borrowers more than they need to pay over the next two or three years as these 3, 5 and 7 year ARM's move into the adjustable portion of the mortgage. The bottom line for the day For now, rates hiked up another 1/8% today for the 30 year fixed, the 10 year treasury bond closed at it's highest yield for 2005 and the Fed is not stopping rate hikes any time soon. If you are thinking of refinancing, do it soon. If you are thinking of changing that ARM into a fixed rate, do it now, before the rates go even higher. If you are wondering whether or not this is the right decision for you, then give me a call or click on that chat button up in the top left of the page and I will be happy to answer your questions. Have a great day..........Scott Updated Forecasts This continuing trend of higher and higher rates has caused me to change the rate lock advisory to lock for all four stages. In addition, I have updated my forecast to show rising rates for the second half of 2005. This is a combination of what we have seen in both the market and the economic reports over the last 3 months and the continued tendencies of the market to shoot higher of very little good news. Now, on the bright side, the global economy is still going nowhere. We have quite a quandary where if the market does not rise in response to continued increases by the Fed we could see an inverted rate curve due to the global pressures. This is still a very good possibility and should we see anything close to an inversion, rates could drop quickly. The very high number of mortgages that are ARM's vs Fixed rates would switch in a heartbeat if you can get a 30 year fixed at a lower rate than a 5 year ARM!! If this fine line were to get crossed, you can throw all the forecasts of higher rates right out the window. Where are rates headed in the next 3 months? It looks like the trend will be heading steady or higher with new projections out and the higher oil prices and Fed rate increases driving rates over the next 3 months The September Fed Meeting You can read the Fed's statement on the Board of Governor's Federal Reserve website for yourself. For the 11th straight time, the Fed has increased the Federal funds rate, citing inflationary pressures from energy prices as the reasoning in raising rates one more time. The Fed did make a point of stating that in the long term, inflation was under control. Where are rates going this year? The entire first part of the year, I have been sticking with the experts position that for the year of 2005, we can expect to see mortgage rates to level out in the 6.5% to 6.75% range for a 30 year fixed rate mortgage by the end of the year. Although this forecast has been the same for the last 3 years and has yet to materialize, this long term forecast must be still taken into account. My personal expectations are that 30 year rates will be rising for the second half of 2005 barring any more terrorist attacks. If I were financing/refinancing a home . . . . I would Lock if my closing was within 10 days I would Lock if my closing was 11- 30 days away I would Lock if my closing was 31 - 45 days away I would Lock if my closing was more than 45 days away *As always, this commentary is only my personal opinion if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of any/all other borrowers. DailyInterest.com
is brought to you courtesy of Scott Campbell of DailyInterest.com
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