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Why are refinance mortgage rates higher than mortgage rates for purchase?

Brooke
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In my opinion, there is no reason for refinance mortgage rates and mortgage rates to be different. I believe the difference currently is partly due to a refinancing boom and also due to easier securitizability of mortgage loans for purchase.

I think market goes through cycles and since we are late into the accommodation cycle, the difference might look like a lot. I think later 2002 was similar, and hence refi - purchase rates might have been high then too

Why are refinance mortgage rates higher than mortgage rates for purchase?

Should I refinance mortgage rates right now or should I wait?

Questions to answer:

  1. How much do you owe on the home?
  2. Your Current interest rate?
  3. Years left on current loan?
  4. Total current payment (interest, principal, and PMI, if applicable, but not taxes).
  5. Anticipated rate for new loan?
  6. Cost of new loan (fees, etc.)
  7. What is your goal? Save interest during the term of the mortgage? Lower your payment? Pay off mortgage faster?

With this information, you can then figure out if it makes sense to refi.

If you are paying PMI, but you have enough equity, it may make sense to refinance.

if you don’t pay PMI and are more than 10 years into your current mortgage, it may make more sense to simply keep this mortgage and add a bit extra to each mortgage payment to quickly pay down the loan.

If you wish to lower your monthly payment you may end up paying MORE interest over the life of the new refi-mortgage even if your rate is lower.

You can respond with these details and I’ll help you with some mortgage math to see if a refinance makes sense.

How long will low mortgage rates last now that inflation has begun to rise?

Firstly, no one can predict the future. Secondly, I think that the current inflation is the result of supply chain problems and will slowly decline; some even say that it has already peaked at 6.2% and will either remain stable for a few more months or even begin to decline as problems in the supply chain are eliminated. 

CNBC last week noted that the number of containers located in the ports of Los Angeles or Los Angeles and Long Beach has decreased by 29%. 

Good news! In addition, since "inflation" is a comparison of prices "today" with prices a year ago (considered basic), "inflation" is not always what it seems. An inexpensive month a year ago can affect the inflation rate today just as an expensive month a year ago can distort it the other way. 

It's really a trend that matters, and although it's gone up, it doesn't seem to be growing as fast as it did just two months ago, so, weakening or just pausing? Nobody knows.

Mortgage rates are a curious mix of what the yield or interest rate on US treasuries and even the LIBOR are, and ‘what the market will bear as well as what the competition forces competitive lenders to charge. 

There is no ‘magic formula' that dictates exactly what it should be, and therefore it can vary from lender to lender. And, of course, your credit score, income, and so on will affect what lenders offer you. 

I still get the occasional offer to refi at 2.25% even though ‘officially’ the rate is ‘supposed to be a little north of 3%.

Best guess is that inflation will slowly abate and mortgage rates over the next few months will slowly pull back again, but that’s just a guess. And since no one can predict the future that’s as good as anyone can do.

Are mortgage refinances good for the economy? refinances good for the economy?

U.S. homeowners are among the unexpected beneficiaries of fears of slowing global growth that are contributing to a plunge in mortgage interest rates. A wave of mortgage refinancing to secure lower interest rates will increase household cash flow and support consumption.

Investors, however, should be careful of the ways that refinancing, Federal Reserve policy, and the technical features of the bond market could interact to generate additional volatility in bond yields.

At 3.6%, the interest rate on the typical 30-year fixed mortgage is now at its lowest level in nearly three yearsFrom the beginning of 2017 to the end of June, mortgage rates averaged about 4.3%.

As recently as November, new borrowers had to pay 5% to borrow a house. A sharp drop should have a big impact on refinancing activity. USA households owe roughly $9.4 trillion in mortgage debt.

And a bit more than half of that takes the form of conventional home loans that conform to standards set by Fannie Mae and Freddie Mac. More than 90% of those 30-year mortgages have an interest rate above the current market rate.

Not all of those borrowers will mortgage refinance prepaying one mortgage and replacing it with another comes with hassles and closing costs but many probably will.

The low estimate comes from analysts at Black Knight, a mortgage research firm, who think that about 10 million mortgages would be candidates for refinancing, based on today’s market rate (3.6%), interest rates on existing mortgages (at least 4.25%), credit score (above 720), and loan-to-value ratios (below 80%).

Should market rates drop to 3.4%, Black Knight estimates that the number of potential refinancing candidates would jump to 13 million. Mortgage rates of 3%, which will mean a sharp decline compared to the current level, will lead to 20 million candidates for refinancing.

What indicia do you use to calculate the ideal time to fix your mortgage rate? rate?

I have five houses and I have refinanced them probably thirty times in total. There are a lot of good reasons to refinance, and I think I'm an expert in that right now. I've even held seminars, memorized rate tables, and can re-evaluate people for mortgage loans. I do it as a hobby. I don't have a life of my own.

Now there are many reasons to refinance and I have refinanced a few times for the wrong reasons, but knowing in advance that I was doing it but doing it anyway to achieve a particular goal:

  • Reduce monthly payments
  • Eliminate the mortgage as quickly as possible
  • Stall an impending foreclosure by buying time
  • Pull a Bunch of Money out of Your House for Any Reason

Probably the primary reason to refinance is to achieve a lower interest rate and therefore get a lower monthly payment. 

Over the course of a mortgage, this saves tens of thousands of dollars. Remember that when you buy a house and mortgage it for 30 years, you end up paying two or three times the price of the house by the time the mortgage is paid off, simply because of the compounding power of interest. 

That 400,000 dollars house will easily cost you 1,200,000 over thirty years. Therefore, it is well worth refinancing if the rates go down.

In the past, many people would say that refinancing is done when the amortization of the costs can result in a break-even of seven years or less. 

Therefore, if you don't plan to stay in the house for seven more years you probably shouldn't bother. However, this assumes that your lifestyle and income stays the same or grows. 

It does not take into account your current financial situation. If you are in a situation where you can't make your monthly bills, reducing your mortgage payment is like getting a raise -- at least it feels that way -- it puts significant money in your pocket every month for other things.

The problem with refinancing to 30 years is that even with the reduced payments, you are resetting the 30-year clock (if you get a 30-year mortgage). 

This is the amount you will have to pay if you don't switch to a 15- or ten-year mortgage, but in this case, in many cases, you get a larger mortgage payment than before, only for a shorter period, and therefore you don't reach the goal of reducing monthly payments.

On the other hand, you REALLY save 100 out of 1000 dollars over the life of the loan, or at least 10 out of 1000 dollars. 

It all depends on what your goal is. Some people say I don't want to pay off my mortgage because I lose the tax deduction, but this is just silly.

When people are young and have limited funds, a 30-year mortgage with a low-interest rate is the most attractive option.

I strongly recommend that most people own real estate as a good way to create wealth in the future. It has worked well for me, but it takes common sense and making good choices, for example, buying property in an area where you expect values to rise. 

It's much riskier to buy property in shitholes like Detroit or St Louis than it is to buy in Boston for example. People can, and do, lose money in real estate, but over time it does pay off.

You can never trust a mortgage broker. They have one goal and one goal only -- to push paper on you whether or not it's to your advantage to refinance. 

I had a mortgage broker try to convince me it was to my advantage to refinance to a higher rate. 

I hung upon him. Mortgage brokering is poorly regulated and poorly monitored. It's one of the reasons we had the mortgage crisis in the first place and it STILL HAS NOT BEEN FIXED. 

Even now, we are seeing banks and brokers weaken lending standards. The mortgage bubble WILL happen again.

So, what would be the driving force behind the decision to refinance? If rates are dropping you can easily look at a mortgage rate chart to determine how much you are going to save. 

Your monthly payment has fees and escrows. You must subtract them to get your principal and interest payment every month, then compare it to the new payment at the new rate. 

If the amount you will pay after the refi is attractive to you, then it's probably worth it. But you have to take the expenses into account -- every broker and bank charges different things for their services. 

That is why all banks advertise the APR with the mortgage rate -- the APR includes the costs of their selling you the loan. 

This included "points". A point is a percentage of the principalFor example, if your house is worth $200,000 and the loan has one point, then that means they charge you one percent of that amount, or $2,000, to do business with them. 

Many times they will give you a lower interest rate for more points, and you can go to four or even more points, but you would onyl do this if you were refinancing to stave off impending foreclosure. Points are bullshit. 

The bank is charging you simply to get your money. But be that as it may, these are the costs of doing business along with attorney's fees, fees for registration of ownership, and other fees that banks charge for inaction or next to nothing. 

I always buy a "no points, no closing costs" loan, which is called a "No-no" in the industry. The rate is higher, but there is no amortization to worry about -- you reduce your monthly payments and that's it.

Some people don't understand amortization and their eyes roll up into their heads when I speak of it. It's just the amount of expenses divided by the money you save each month from refinancing. 

The result gives you the number of months it will take for you to break even from the refinance. Essentially, it's telling you the minimum number of months you must stay in the house before you move. Hehe.

Now, if your refinancing is a desperate move to prevent foreclosure, which I've done a couple of times, then you don't care about the cost of the loan or the amortization period -- your goal is to reduce monthly payments so that you can maximize your rentals income to cover the mortgage and expenses. 

Under those desperate conditions, you refinance to thirty years at say three points to get the lowest interest rate, pay closing costs, and set up the loan closing so that the mortgage doesn't start till two months hence. 

That puts a month of mortgage dollars into your pocket in addition to the reduced payment. Again, this is only done when it's a desperate situation because you are essentially RAISING the amount you owe and that will cost thousands over the course of the loan, but if saving the property is key, it's a strategy that will forestall foreclosure - and you can refinance up to three times per year. 

If you time it correctly, you can avoid making payments for three months in a year, but I absolutely do not recommend it unless it's a desperate situation.

Some people use their house as if it were an ATM. When property values were going up it was easy to refinance for a higher amount at a lower rate and take a cash-out. 

The lending organization gives a check to you. The hope is that property values will still go up and that you will sell the house and the whole thing will go away. Unless you really need the money for college, medical or solid investments, it's probably a mistake to refi-cash out to buy a boat or vehicle or take a vacation. 

For most people their house is their biggest asset and the primary leg of their retirement "stool" -- the others being social security and pension/savings/investment plans. If you weaken that leg it makes it harder to maintain your life at retirement -- especially if you buy a depreciating asset like an automobile.

Ultimately you have to decide how much money per month that you will realize from refinancing that will make you decide to do it. 

For me, it's typically 125 dollars per month. Working with the tables of rates/payments or using a calculator such as in Bankrate dot com, you can quite easily determine what is profitable for you.

This ends my overly long article, however, some people ask me how they can easily determine the biggest house they can buy. You can do this with a few simple calculations. 

Of course, everything is flexible but as a general rule, take your gross annual income, divide by twelve (to get monthly income) and multiply by .30. 

This gives you the max monthly payment you can spend on a mortgage. Now you have to remember that your mortgage will include fees and escrows, so you have to back those out as well. 

Typically I use 500 dollars as a base, but you would more accurately derive it by dividing up your expected tax bill, insurance, PMI, or other fees. 

In addition, you have to account for college loan payments, car loans, and credit card debt. 

The more debt you have, the lower your multiplier should be - dropping from .30 (as shown above) to as low as .25 if you carry a big college loan, car payment, and owe alot on credit cards. 

In any case, after you get this number, go to a monthly payment table and find the prevailing rate table and divide that number out remembering that the tables give you a figure per 1000 dollars. 

To make it easy, four percent, which is about a typical interest rate today, results in a divider of something like .004. The result of this is the biggest house you can afford.

Example:

Gross annual income is $150,000
Monthly income: $12,500
Max monthly payment gross: .30
Monthly auto loan? .28
Monthly college payments? .26
High credit card payments? .24
Max monthly payment: 3000
Fees and escrows: 500
Max principal and interest: 2500
Interest rate of mortgage: 4
Divider for house price: .004
Max price of house (2500 divided by .004): $625,000

So you can look for houses in this price range with some reasonable assurance of getting qualified. Please note that you can add your available down payment to the price

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