Mortgage rates reached another modern-day low, and homeowners took advantage by refinancing.
The benchmark 30-year fixed-rate mortgage fell 6 basis points this week, to 4.53 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.42 discount and origination points. One year ago, the mortgage index was 5.41 percent; four weeks ago, it was 4.66 percent.
This is the lowest that the 30-year fixed has been in the 25-year history of Bankrate's weekly survey. The previous record was 4.57 percent, set Aug. 11. Mortgage rates haven't been this low in more than half a century. Rates on FHA-insured mortgages averaged 4.56 percent in February 1955, according to the National Bureau of Economic Research. Conventional mortgage rates probably were similar, although records are sketchy.
Weekly national mortgage survey
Results of Bankrate.com's Sept. 1, 2010 weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
The benchmark 15-year fixed-rate mortgage fell 3 basis points, to 4.05 percent. The benchmark 5/1 adjustable-rate mortgage rose 1 basis point, to 3.86 percent. The benchmark 30-year, fixed-rate jumbo fell 5 basis points, to 5.17 percent.
Higher costsMortgage rates have lingered below 5 percent since mid-May because of the sluggish economy. Home sales are weak. About 83 percent of mortgage applications last week were submitted by homeowners who wanted to refinance, according to the Mortgage Bankers Association.
When borrowers get a look at their rates and fees, they're likely to be surprised. Rates often are higher than advertised. When that happens, it's seldom the result of bait-and-switch tactics. Instead, rates and costs are higher because of risk-adjustment fees that Fannie Mae and Freddie Mac add. Fannie calls these fees "loan level price adjustments" and Freddie calls them "postsettlement delivery fees." They can add up.
For example, if the owner of a condominium unit has a credit score of 730 and is doing a cash-out refinance for 80 percent of the condo's appraised value, the loan level price adjustments on a 30-year fixed would add up to 2 percent of the loan amount.
The borrower would have the option of paying that as a fee at closing ($6,000 on a $300,000 loan, plus other closing costs ) or paying it in the form of a higher interest rate. Translated into a higher rate, a 2 percent fee could jack up the rate by at least a quarter of a percentage point, and quite likely even more than that.
How it breaks downIn the above scenario, the 2 percent fee would break down as follows:
- 0.25 percent "adverse market delivery charge" because house prices have been falling.
- 0.25 loan level price adjustment for getting a mortgage at 80 percent with a credit score of 730.
- 0.75 percent fee for getting a loan on a condo for between 75 and 80 percent of its value.
- 0.75 percent cash-out refi fee.
Some of those fees would be higher for someone with a lower credit score or a higher loan-to-value ratio. On the other hand, some of the fees would be lower for a borrower who owns a house instead of a condo, or someone getting a rate-and-term refi instead of a cash-out refi. Fees are lower for borrowers getting 15-year mortgages instead of 20- or 30-year loans.
"The only way you'll never have any adjustment is if you're doing a rate-and-term refi and your credit score is over 740," says Jim Sahnger, a mortgage consultant for Palm Beach Financial Network in Stuart, Fla .
At a credit score of 720 to 739, "typically you're not going to incur anything unless you're looking to take cash out," he says. And if your credit score is below 720, expect the interest rate to climb at least one-eighth of a percentage point.
Borrowers frequently are dismayed by these added fees, which come not from the banks but from Fannie and Freddie. The fees discourage some borrowers from refinancing, even though Fannie and Freddie are controlled by the federal government, and even though the federal government's policy is to encourage homeowners to save money by refinancing.