The Mortgage Bankers Association had an interesting statistic released earlier this week. They reported that overall mortgage application volume dropped 6.2% this week, from its previous report. Applications to purchase a home were down 4%, while refinancing activity was down 8% from this time last week. They also noted mortgage rates are about 84 basis points lower than they were at this time last year.
Earlier today, I heard a reporter on CNBC quoting these statistics literally, which is technically misleading and misguided on many levels. Firstly, she failed to mention that mortgage refinancing activity is up 167% year over year, and will continue to grow, in my humble opinion. The fact of the matter is, almost nothing ever travels in a perfectly straight line. Secondly, she didn’t mention that rates took a breather from their recent decent, and inched a bit higher on talks of a trade agreement with China.
Granted, not everyone is taking advantage of the newly low mortgage rates. Over 10 million potential beneficiaries of a refinance have yet to act on the recent opportunities. While I believe that everyone should be inquiring about a potential refinance, I do believe that not everyone should necessarily “pull the trigger” unless it’s truly warranted. I also believe that part of the guidance should take into consideration the fact that the Federal Reserve is meeting again in September, and they will likely cut short-term rates at least 25 basis points again. You heard it here first.
I was speaking with a potential client, and he wanted to know what my rate offering would be for his anticipated refinance. He was diligently shopping around for the best rate on a new mortgage and wanted to to get a quote for me before he made his final decision. He was transparent enough to tell me most of his conversations with the other banks and brokers. He also told me that he found a “great rate” at a community bank.
Frankly speaking, I could not beat their rate quote; That should have been the end of our conversation. He proudly told me that most of the other mortgage people commended him on that “find,” and told him to “Grab it!” I continued to ask him the same string of questions that I would ask all of my valuable clientele, which included asking detailed information about his current mortgage terms.
Without going into specifics of the situation, this revised illustration more than appropriately explains his comparable circumstance. He was currently in a 15-year mortgage with a rate close to 5%, which began in 2011. His original mortgage balance was over $500,000, but he paid extra “towards principal” every once in a while. Despite the fact that mortgage rates on a new 15-year mortgage are “In the 2’s,” I explained that I was more concerned about what was being accomplished than I was about the actual number. I spent the time to do the analysis, and what I determined for him came as a shock. He had paid a majority of the interest on his loan by now, and what remained was mostly principal payments. My recommendation was not to do anything if his sole purpose was merely a lower rate.
I’ve been around the block, and I know that a lot of what ‘moves someone to act’ is the psychological aspect of things. It is the same reason that the Mortgage Bankers Association reported that mortgage application dropped this week. When people heard reports that rates inched higher earlier in the week, they weren’t as diligent or anxious in their pursuits of a refinance. A few basis-points move in one direction or another won’t make that much of a significant impact for most mortgage payments. Similarly, getting a lower rate can be more psychological than beneficial as I outlined in the case above.
At the same time, very often, it might not even be about the magical “low rate.” I had a client who wasn’t able to get a good rate because of poor credit, and other past issues. Despite offering him a rate which was over 1% more than the current market, he was able to pay off tens of thousands of in debts and saved over $1,000 a month on his overall monthly obligations. The takeaway here is that refinancing for the right reason, with the right analysis is often more important than the actual rate that you receive. Wishing everyone a happy rate-shopping season!
By Shmuel Shayowitz