Low interest rates have created a boom in the home-loan market, particularly on the refinance side. I spoke by phone with Craig Strent, CEO and co-founder of Rockville-based Apex Home Loans, one of greater Washington’s largest independent mortgage banking firms, about the boom in refinancing. Here is a condensed transcript of our conversation:
It seems that the mortgage market is dominated by refinancers. Why are they the ones reaping the most benefit from low mortgage rates?
Refinancers are benefiting the most from low mortgage rates simply because they can save money on their mortgage. If you can lower your interest rate and it makes sense to do it from a cost-benefit standpoint, you’re going to do it very often. Something that’s very common nowadays is what’s called a no-cost refinance. This is where someone opts for a slightly above market interest rate in lieu of paying any closing costs and still lowers their rate. It’s kind of a no-brainer. If you’re at 4½ percent and you can have 4 percent and there’s no cost to do it, there’s really no reason not to do it.
Every refinance has what’s called a break-even period associated with it. The way you ascertain a break-even period is you simply take the savings divided by the cost and that gives you a number. If you’re going to be there in the house at least that long — let’s say it’s 15 months or whatever it is — then typically you’re going to be saving money. As long as you can reach a break-even point, the refinance makes sense. But given that so many people refinanced just recently — I mean people refinanced just six, nine, 12 months ago who are looking at doing it again — a lot of those people don’t want to absorb closing costs again and lose equity on it so they’re going for a no-cost refi. A no-cost refi is usually about a quarter percent to three-eighths percent above the going rate.
It’s easier to do on higher loan amounts and it’s easier to do in Maryland and D.C. where closing costs are lower. Virginia is a little harder to do it, but you can do it. D.C. and Maryland typically have lower closing costs than Virginia and the reason is in Virginia you have to pay to record the mortgage every time around. Virginia is the cheapest to buy, but the most expensive to re-fi.
People are obviously being tempted by low mortgage rates to refinance, but does it always make sense to refinance?
If your break-even period is a reasonable amount of time that you know you’re going to live in the house that long, then a refinance makes sense. Alternatively, if you can lower your interest rate with no closing costs, then a refi is a no-brainer.
Freddie Mac came out with a report last week that more than 95 percent of refinancing borrowers chose fixed-rated mortgages in the second quarter. It seems borrowers must feel that mortgage rates can’t go any lower and they should lock in a low rate. But would it be worth it to get an even lower rate with an adjustable-rate mortgage?
For people that have long-term plans for their home, a fixed rate is often going to be the best option for them. If you are staying in your house long term and you feel like rates are at or near historic lows, absolutely people are locking down fixed rates, and if they can refinance and lower their fixed rate again, they are doing it.
Obviously, you are going to have a high percentage of fixed-rate mortgages in the low-rate environment. But there’s also a population of people that are going to be moving in the next five to seven years, or even two to three years, and these people are oftentimes not thinking about refinancing. People always think about going from a fixed rate to a fixed rate or from an adjustable rate to a fixed rate. But there’s also a really good opportunity right now to go from a fixed rate to an adjustable. If you’re paying 4 percent on a 30-year fixed, you think you’ve got it made and you don’t need to refi. But if you’re moving in two or three years, you could take a five-year arm, which is a fixed rate at 2½ percent, and you save $10,000 over the next two or three years. That’s your down-payment money for the next house.
You don’t want to go into an ARM if your plans for the house are long term. You’re going to save short term but then if you have to refinance at the end of the ARM and the rate’s higher, you potentially negate your savings. People that are in good positions to take ARMs right now are those who think they might sell their homes and move in the next five to 10 years.
Where do you think mortgage rates are headed? They have gone up slightly the past three weeks. Have we seen the bottom?
Obviously, that’s very difficult to say . . . People should be prepared for the dips. What I mean by that is that there’s a very big population of people that I talk to regularly. At 3.75 percent, they don’t want 3.75 percent, they want 3.5 percent. At 3.5 percent, they don’t want 3.5 percent. They want 3.25 percent. People always want something they can’t have.
Right now, we’ve seen rates tick back up into the higher 3s. Those people that are upset, who feel like they missed the bottom, what those people must do and what I really advise people to do, they should talk to a mortgage professional and set a target so that somebody can track it for them. If it hits 3.5 percent again and they go to lock it, it’s going to be up again. So you want to preset a target so that you don’t miss the opportunity. When rates hit all-time lows, they really only stay there for a short period time. So you’ve got to be prepared to lock it in at that bottom.
I would also add a caveat to that: Don’t be greedy. Be reasonable.