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Don't base mortgage decision solely on Fed's move

Don't base mortgage decision on the Federal Reserve's move

WASHINGTON — When the Federal Reserve recently rolled out its plan to pump $600 billion into the credit markets, many homeowners and buyers might have figured that since mortgage interest rates are now likely to fall again, why not postpone the loan application they were contemplating?

Fed Chairman Ben Bernanke offered implicit support for that scenario when, in a Washington Post op-ed column on Nov. 4, he wrote that as a by-product of the $600 billion infusion, "lower mortgage rates will make housing more affordable and allow more homeowners to refinance."

But wait a minute: Haven't 30-year fixed mortgage rates been hovering around 4 1/4 percent, the lowest level on record since April 1951? Aren't 15-year mortgages just above 3.6 percent? How much lower could rates possibly go?

More to the point on refinancings, since we're already well into a refi boomlet, with lenders reporting anywhere from 70 to 85 percent of new mortgage volume going to refinancings, how much more of a market share can the Fed expect? Housing economists generally don't anticipate seeing significant direct impacts on mortgage rates from the Fed's move. David Crowe, chief economist of the National Association of Home Builders, says the likely effect will be to restrain rate increases that otherwise would occur over the coming year, as the economy warms up.

Amy Crews Cutts, deputy chief economist for mortgage giant Freddie Mac, says the $600 billion might only "tweak" rates downward from current levels.

"Four and an eighth is far more likely than 4 percent" on 30-year fixed rate loans, she said in an interview, because the Fed is not buying mortgage-backed securities but rather Treasury bonds.

Which raises the question: Does it make more sense to wait around for a rate bottom that might not materialize, or to lock in rates now at what are multigenerational lows?

Cutts has a personal answer. She recently refinanced her home loan through a mortgage broker to 4 1/2 percent fixed for 30 years, and is saving $100 a month on payments. What is she doing with the extra $100? Plowing it back into her new mortgage, reducing principal to shorten the term of the note and paying it off sooner. Crowe has refinanced two loans in recent months.

Peter Ogilvie, president of First Residential Mortgage Corp. in Santa Cruz, Calif., says "refinancing makes sense for just about anybody with a rate over 5 1/4 percent," and often produces monthly savings even for people with notes in the upper 4 percent range — provided, of course, that they can qualify under the industry's toughened credit and loan-to-value underwriting standards.

Some homeowners may also be good candidates for so-called no-cost refinancing, where the title, escrow and lender closing charges are either added to the mortgage principal balance or paid for over time with a slightly higher note rate. The idea here, says Ogilvie, is to reduce your monthly housing payments — improving cash flow without laying out dollars at settlement.

Jeff Lipes, senior vice president of Family Choice Mortgage in Hartford, Conn., and president of the Connecticut Mortgage Bankers Association, has what he calls a 24-month rule-of-thumb for deciding whether a refinancing makes sense: If you can pay for the closing and other expenses of the rate reduction in about two years, you should consider a refi.

Take this example: Say you have a 5 3/4 percent fixed rate 30-year loan at $200,000, paying $1,167 a month in principal and interest. If you refi to a fixed rate $200,000 loan at 4 3/4 percent you'll be paying $1,043 a month, a $124 monthly saving, or $1,488 a year. Since prepaid charges, tax escrows and closing costs will come to about $3,000, Lipes calculates, you should recoup virtually all your costs in the first 24 months.

Steve Stamets, a loan officer for Union Mortgage Group in Rockville, Md., says homeowners who'd like to be debt-free faster ought to consider a refi out of their current 30-year term loan into a 15-year term. Fifteen-year mortgages carry lower rates than 30-year loans, but their faster amortization schedules require higher monthly payments.

Here's an example, using the no-cost option: Say you took out a $300,000 fixed-rate loan during the rate dip in 2003 at 5 percent. Current balance is around $264,000, with monthly principal and interest of $1,613. Rolling the closing, insurance, tax and other loan costs of about $5,000 into a new $269,000 15-year mortgage at 3 3/4 percent produces a payment of $1,958. If you can afford it, that extra $345 a month will save you many thousands of dollars in interest compared with the 30-year alternative, says Stamets, and make you mortgage-free in 15 years.

Kenneth R. Harney can be reached at kenharney@earthlink.net.

Don't base mortgage decision solely on Fed's move 11/12/10 [Last modified: Friday, November 12, 2010 3:30am]
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