Refi procrastinators, time to get off the fence

3 min read

This week’s rate: 6.40% 5.82% 4.68%
Change from last week: +0.17% +0.19% +0.16
Monthly payment: $938.26 $1,251.24 $776.15
Change from last week: +$16.63 +$15.24 +$14.34

Mortgage rates, which started spiking a couple weeks ago, shot up again this week to 6.40 for the 30-year fixed-rate, according to the national survey of large lenders.

That’s an increase of 17 basis points since last week and 38 basis points since the low of 6.02 on Oct. 9. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average of 0.50 discount and origination points.

Despite the rise,
mortgage rates are still historically low. If you’re thinking of refinancing, it’s time to act.

The economy appears to be in the early stages of regaining its stamina. It will likely be a slow process with a good chance of a relapse or two along the way. But homeowners who are waiting for the absolutely lowest rate before refinancing their mortgage may be making a costly mistake.

“People sit there and think rates will get better, but they don’t. They move up and then the person loses out. When rates were 5.75 they couldn’t make a decision,” says Richard McCrary, president of Hammond Crossing Mortgage in Dunwoody, Ga.

A lot of fence sitters have gotten stung, especially last week when mortgage rates rebounded to a five-week high.

“It’s been incredible, we’ve been extremely busy,” says Morgan Brawner, Florida region president of SOUTHBank.

“The majority of the people who came in when the rates went down the second time jumped on the bandwagon because they missed it last year. The ones who are coming in now are nervous because rates are going up.”

As busy as lenders are, applications for purchases and refinancings dropped by more than 12 percent last week. Refis represented about 74 percent of the applications, down from 78 percent the previous week , according to the Mortgage Bankers Association.

So, while the refi has cooled as rates have risen, it’s still a booming business.

Rick Gillespie, chief marketing officer for GMAC Residential, says he expects the flood of refinancings to remain strong through the end of this year and into 2003.

“People need to make smart decisions based on their own situation. If it is smart for them, they need to proceed as opposed to waiting to see if rates will drop again.”

If you opt to refinance, be prepared for a bit of a wait. New home purchases generally take precedence over refis. That, combined with the increased volume of business your local lender is experiencing, may mean locking in a rate for longer than normal.

“I always tell people to give us sufficient time to close your loans,” says Jeff Kramer of King Financial Group in Dallas.

“Rates aren’t 8 percent. When they are we can turn a loan around in five days. The entire mortgage system is clogged up. Some companies won’t allow a 30-day refi lock; you have to do a 45-day lock. That can affect the rate. The longer the lock, you’re going to take a higher rate.”

Despite low rates, refinancing isn’t for everyone. If you borrowed 90 percent of your home’s value a few years ago and you haven’t increased your equity very much, it may not make sense to refinance, especially when closing costs are rolled in.

If you have a lot of debt or are having trouble paying bills on time, you may pay more by refinancing than by sticking with your current loan.

Richard McCrary says one way to determine if you’re too deep in debt is to do a little math and figure out your so-called front and back ratios.

“The front ratio is principal, interest, taxes and insurance divided by monthly income. You don’t want that number to exceed 28, or 30 tops. Back ratio is all other monthly expenses: installment loans, credit cards, student loans, etc. Add that to principal, interest, taxes and insurance and divide by your monthly income. That number shouldn’t exceed 36,” McCrary says.

An example of the front ratio; if your household gross income is $3,500 a month; the house payment shouldn’t be higher than 28 percent of that, or $980.

On the back end, you wouldn’t want all of those monthly expenses to top $1,260.

Another consideration is how long it will take to pay off the refinancing costs.

“If the payback is 36 months or less, it’s a no-brainer if you’re going to be in the house for a while,” according to McCrary. “Three to five years, look at the savings and figure it out. If the payback is over five years, it might not be worth it. If the new loan only saves you a couple thousand, it’s probably not worth it. If it saves you $10,000 or more, that’s worth it.”

Waiting for interest rates to fall in an improving economic environment is a game you don’t want to play.