Higher Mortgage Rates May Hamper Obama's Housing PlanTopic: Mortgage
With disappointing results from his foreclosure rescue program and an election year on the horizon, President Obama last fall set his sights on refinancing, specifically helping borrowers who owe far more on their mortgages than their homes are currently worth.
The Home Affordable Refinance Program (HARP) kicked into gear at the beginning of this year and has been very popular, with some banks reporting its share at about 30 percent of all refinances.
The idea of HARP was not only to help underwater borrowers stay afloat with payments but also to put more money in their pockets, which in turn could serve as a wider economic stimulus. That's all well and good when interest rates are hovering around record lows. Now, thanks to an improving economy, mortgage rates are rising.
"With the rate increase last week, refinances are obviously slowing, and the refinance share at 73 percent is down to its lowest level since last July", said Jay Brinkmann, MBA's Senior Vice President of Research and Education. "With rate/term refinances falling as we go forward, HARP will be a bigger percentage of refinances but will be more concentrated in certain states," Brinkmann continued in today's weekly mortgage application report.
The states that had the worst mortgage delinquencies will likely now see the highest share of HARP refinances, as they have the sharpest home price drops. In fact, it is already happening. Florida's refis were up 49 percent in February month-to-month, Arizona up 61 percent and Nevada up 71 percent, according to the MBA. Refinances in the rest of the country were generally flat or down.
"HARP clearly is a driving force in those states that saw the most defaults and the biggest drops in home equity."
Rates are still historically low, but so many borrowers have already refinanced at rates below 4 percent that anything above now seems comparatively high.
"As rates rise, the economics shift for the borrower. It makes refinancing less attractive", says Jaret Seiberg of Guggenheim Partners. "In the short term it could lead to a spike in refinancing as borrowers rush to lock in rates before they go even higher", he adds.
Most analysts say they do not expect rates to spike higher than 4.5 percent on the 30-year fixed, at least not this year, although some say they could head toward 5 percent in 2013.
"Even if mortgage rates rise as much as 50 basis points this year, most of the people looking to take advantage of the underwater refi programs would still benefit. By definition, we are talking about a pre-2009 group of borrowers and in many cases pre-2007 borrowers who have 5 1/2 percent or more mortgages. Most would be happy to save 100 basis points on a refi," says Guy Cecala of Inside Mortgage Finance. "The real test of the Refi programs, I believe, is whether they will actually get a lot more borrowers approved. The level of interest rates is to some extent, the least of the challenges."
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Don't ask your real estate agent for irtinmafoon regarding your mortgage .they aren't mortgage experts and are just as likley to tell you something that is wrong as they are something that is right. Mortgage Points can mean alot of things. A Point simply means one percent of a loan amount. Whether that one percent is a downpayment, money going to the broker, money used to buy a lower rate, etc. So, get your broker to clarify what they mean when they say, points. It sounds like you mean points to buy the rate down. This is never a bad idea assuming that you have the cash to pay for it. But, you can reach a point of diminishing returns. Usually anything beyond the 2-3% range is out of hand and isn't going to really benefit you. Never, ever, ever pay buy down points on an ARM. The benefit only exists if you stay in that mortgage for several years. Now, what should you do? Well, it depends on how much cash you have. Its important that you don't put all your money down. You need reserves otherwise what are you going to do the first time the washing machine goes up on you? If you can afford to buy the rate down by 2% and you intend to stay in the mortgage for 10+ years before refinancing then do it. It will result in lower payments and less interest paid. Additionally, you can recoup some of the points paid on your taxes. If you intend to sell the home after 5 years, or think that you will likely refinance sometime in the next few years then don't pay the points. The upfront fees won't be recouped. Think of it this way: Lets say you spend $5000 to buy the rate down and it results in a $100 per month savings. Then it would take you 50 months to recoup the $5000. What if you paid $2000 and saved $75 dollars .that would be a lot less time that you would have to wait to recoup your investment. What if you paid $8000 and saved $110 per month? Thats too much. So, why not just put the money that you pay towards your point directly towards your downpayment? That would lower your payment, but only about $7 per thousand paid. Thus, in the above scenario putting an additional $2000 down lowers your payment about $14. Putting $8000 down would lower your payment by $56. Thats why you pay the points instead of putting the money down. On the flip side even though putting $8000 down wouldn't save you money every month it may put you into a new loan bracket where the lender sees less risk in your application. That might make the difference between an OK rate and a great rate. Every scenario is different.If your broker can't explain this to you .stop working with them. Call me!
Great question, Dana. That loan amnuot is small, and most closing costs are fixed costs, not a percentage of the loan amnuot. So, as a percentage, to get the Par rate, or the lowest going without paying points' to buy the rate down, you would be about 3.5% of the loan amnuot in this case.What I recommend for most, is to bump the rate up by .25% and eliminate the Origination fee, which is the single largest fee in the closing costs.I also like to increase the rate by a bit more for larger loan amnuots, and do a complete Lender Paid Closing Cost Loan , or No Closing Cost loan . However, on a small loan amnuot such as yours it would be too much of an increase in rate to have enough Yield for me to pay all your closing costs. It would not make sense for you.But the second option would, and if I can help, feel free to contact me at the phone number above, or at
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