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Lock soon to secure a rock-bottom mortgage rate

By Holden Lewis ·
Tuesday, May 25, 2010
Posted: 9 am ET

You should lock soon -- like, in the next day or two -- if you want to secure a rock-bottom mortgage rate.

I said this yesterday and I dislike repetition. But this is important. Mortgage rates are extremely low right now. Time to lock, if you're close enough to the closing date that you don't have to pay a rate-lock fee.

Here's what we know: Rates haven't been this low since the mid-1950s. There are two things we don't know: Whether rates will drop farther, and how long these low rates will linger.

You can float, but that's not a smart strategy. It's like asking for another card when you have 19 in blackjack. Stand and take your chances.

In Bankrate's last weekly survey, conducted Wednesday, the 30-year fixed averaged 4.96 percent. It dipped even further Thursday and Friday, just a little. Yesterday, it returned to where it had been last Wednesday.

Around Thanksgiving, the 30-year fixed fell to 5 percent in Bankrate's survey. Two weeks later, it averaged 5.13 percent. Two weeks after that, it averaged 5.33 percent. That was a mercifully slow rise. Rates can go up much quicker than that.

I advise you to lock now because I don't believe the potential reward of floating justifies the risk. Mortgage rates could remain this low for weeks. Or they could drop even more. Or they could rise slowly. Or they could rise quickly. We don't know which. All we know is that mortgage rates are extraordinarily attractive right now. Grab a good one while you can.

A heads-up to mortgage professionals: Around noon Eastern time, I'm going to post an open thread asking readers to write comments giving advice to today's refinancers. If you're an originator, or you have refinanced recently, think about it now and get ready to drop some advice on our readers. Maybe you have something to say about gathering paperwork, or having a realistic idea of the home's value, or something else. Don't post that advice in this thread; wait until the open thread comes up. But give it some thought in the meantime.

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May 27, 2010 at 10:44 am

I am refinancing and is in process, how do I know if I'm paying too much closing cost. What should I check on the GFE? Is it ok to revolve it with my loan or pay it upfront? I have money set aside for that but I want to know if it is the wise thing to do.

Holden Lewis
May 26, 2010 at 3:12 pm

How much total interest would you pay on that $25,000 for 20 years at 4.6 percent, vs paying it off faster at the current rates?

You can do both types of calculations on the mortgage loan calculator.

Del Fee
May 26, 2010 at 2:42 pm

Since 9/2004 I've have a 30 yr fixed 5 1/8% mortgage on $352K orig bal, now owe $325K. I want to pay down some debt so I'm considering a 20 year fixed 4.6% mortgage for $350K (nets me $25K.) Is this a bad idea?

Holden Lewis
May 26, 2010 at 9:59 am

Patrick, you probably would have to pay for mortgage insurance on a refinanced loan. If that's the case, it's probably not a good idea.

Holden Lewis
May 26, 2010 at 9:51 am

LIBOR has been rising, and it's a European-based interest rate, so it probably will rise some more.

At first blush, I think your loan officer is giving sound advice. But on second thought, maybe you should keep the HELOC if you truly plan to pay it off in three to five years, even if the rate (and therefore the payments) shoots way up. The reason is that it will take much longer than three to five years to pay off the home equity debt if it's rolled into a 15- or 30-year mortgage, so the total interest payments on that chunk of debt would be larger over time.

It's rather labor-intensive, but I suggest that you ask your loan officer to run some scenarios or that you run the scenarios yourself, using a mortgage calculator with an amortization schedule. Ask someone, maybe the loan officer, to provide a couple of guesses about what might happen to LIBOR over the next five years -- a "likely" scenario and a "bad case" scenario. Based on those scenarios, what would your total interest-plus-principal payments be on the HELOC if you pay off that debt on the schedule you have in mind?

Then look at what your total principal-plus-interest payments would be on your refinanced loan at 5.75 percent -- first with the current mortgage debt, and second with the mortgage debt plus the HELOC debt.

I hope that's clear.

My hunch is that you'll discover that it's cheaper over the long term, but more painful in the short term, to keep the HELOC and pay that puppy down quickly. And of course keep cash flow in mind -- if you have major expenses ahead, like college tuition or a new car -- keeping the HELOC might squeeze your monthly finances unduly.

May 26, 2010 at 1:03 am

I am looking to refinance a jumbo loan, around 800K. The question is to subordinate the HELOC which we are aggressively paying down and hopefully will pay off in the next 3-5 years or to cash out with a larger amount on the primary loan and lump it all together. The rate on the HELOC is currently 2.9% and tied to the LIBOR and the 30 yr fixed rate on new loan will be 5.75%. My gut is to pay down the HELOC, but the loan officer is telling me to lump it all together to get security of a fixed rate on everything. No plans on leaving anytime soon. Is that really a better deal?

May 25, 2010 at 4:07 pm

I predict the rate will fall another 15 basis points. We're not done in Europe yet. Spain's problems are just beginning to pop up in the financial announcement of bank troubles in that country. Remember how it started here? It's doing the same thing in Europe right now.

That said, as Carnegie once said, only a damn fool holds out for the last dollar. Lock.

Patrick, without knowing your current rates, nobody can say.

May 25, 2010 at 3:17 pm

I understand rates are at an all time low but should I refi from an 80/20 330K total(prop value 350K) of two into a 30 year fixed for $963 closing cost at 4.67 rate. We only plan to be in home for 3 more years(been here 5 years). I have no financial pressure at current monthly payment it would just be a saving move to have more free cash but I'm just a little unsure on pulling the trigger...

What do you think???

May 25, 2010 at 10:51 am

It is ridiculous when I talk w/ borrowers and they still want to rate-watch. Most of them can take a slightly higher rate, still under 5% and refinance free of closing costs, essentially saving themselves THOUSANDS. All they have to do is sign a few papers...