Mortgage Refinancing?

[Jasper]

We've (my wife and I) a 6% ARM that's due to float several years from now. We were happy with the ARM because it wasn't clear we'd be staying for so long, but now it seems increasingly likely. Plus we have a home renovation loan that's at a worse rate we could likely fold in.

We're considering refinancing to aim for a better and fixed rate, especially as we suspect the current bailout fixes nothing, and the current crisis is likely to worsen in the mid-long run. Besides, paying less money is always nice. ;-)

So I come to seek the collective Qt3 wisdom: In light of recent events, when do you think a good time to refinance will be? Should we jump now, for a slight improvement and a fixed rate? Or is the rate likely to drop, say before the election, or before Christmas?


Obviously, this is entirely speculative, but I'm still curious what the Hive Mind thinks.

[WarrenM]

You can get a fixed rate these days for 6% so I see little value in holding onto an ARM.

[BennyProfane]

I will be surprised if the Fed rate drops much in the next few months--there's just not a lot of room for it to drop, and the fed is going to be VERY conservative in what it does in the short term. Plus, I'm not sure banks would lower their rates accordingly even if the fed rate DID drop.

That being said, given how bad business is atm, I'd shop around. I'm guessing if you are a good credit risk, places will really want your business, and might be willing to sweeten things to get you to sign.

[Slainte Mhath]

The news is buzzing with talk of the "credit crunch" and how consumers won't be able to get loans because banks are afraid to lend money right now. That's true, but only to a certain point. Banks are unwilling to take on more risk right now, so they are being very selective in how they lend. However, if you have good credit, have lived in your house for a couple of years now, and don't live in an area where housing prices are depressed, then you can still secure a fixed rate loan at a very nice rate from most of the major lenders.

My advice would be to shop around. You should be able to find fixed rates as low as 6% or even a quarter point less provided you have solid credit. I refinanced at 6% fixed back in summer of 2007, right before all the mortgage crap hit the fan, and I'm still getting emails from the lenders I shopped around at letting me know they'd be happy to refinance me now at the same rate or sometimes lower (though not enough to tempt me currently).

Shop around and see what you're offered. It's a good time to get into a nice fixed rate loan, as (like others have mentioned) the Fed is unlikely lower the rate any further anytime soon.

[dfs]

So I come to seek the collective Qt3 wisdom: In light of recent events, when do you think a good time to refinance will be? Should we jump now, for a slight improvement and a fixed rate? Or is the rate likely to drop, say before the election, or before Christmas?

How could anybody possibly believe that the interest rate is going to drop?

[Kraaze]

There's been talk that the Fed might try for an immediate emergency rate cut to calm panic if today's market freefall continues on into the week.

Though I am doubtful that would actually translate into any better mortgage deals on the horizon for individual consumers looking for mortgages.

[Lorini]

From Bloombergs- (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayeb7TQT.MgY)

10-06-2008

Rate Cuts
The prospect of a global economic slump has caused investors to raise bets the biggest central banks will cut interest rates. Futures on the Chicago Board of Trade show a 52 percent probability the Fed will slash its benchmark interest rate by three quarters of a point at its Oct. 29 meeting. The odds were zero a month ago. Traders began to bet the European Central Bank may cut its key refinancing rate by more than 25 basis points by next month, according to a Credit Suisse Group (http://www.bloomberg.com/apps/quote?ticker=CSMEETEU%3AIND) index of derivatives.
``My biggest concern has been and continues to be that the real economy is going into the doldrums,'' said Thomas Girard (http://search.bloomberg.com/search?q=Thomas+Girard&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a money manager who helps oversee $110 billion in fixed-income assets at New York Life Investment Management in New York. ``That ultimately leads the Federal Reserve to lower rates, maybe over the next six months by 100 basis points, and if that is the case, Treasury yields will decline.''

[shift6]

How could anybody possibly believe that the interest rate is going to drop?
Because decision-makers want banks to start lending again.

[Midnight Son]

Because decision-makers want banks to start lending again.

Only problem is that banks are scared shitless and won't lend, hoarding money. I don't think a rate cut is going to change that.

[dfs]

Only problem is that banks are scared shitless and won't lend, hoarding money. I don't think a rate cut is going to change that.
Yeah. it seems counterintuitive to me that seeing risky investments burn would drive the interest rate down. It would seem to me that the rate should be going up.

I've been wrong before. It happens all the time and I'm not surprised by it, but that's the way it should seem to work.

[Midnight Son]

Right, in a logical world, interest rates would be going up steeply because of the risk.

[Jasper]

Well, except that if the fed cuts rates, the risk effectively goes down...

I can see an argument that actual rates may fall with the fed, as banks compete for safe loans. Risk could instead be handled by actually paying attention to who they lend to, and no longer leveraging their assets multiple times.

I don't buy the argument that banks "won't lend" -- banks lend/invest, or they die. Mortgages to people with solid fundamentals and good credit seems like a reasonable investment even now, despite the "housing crash" (prices weren't inflated where I live, and also haven't crashed -- they've gone up). The problem has been bad mortgages, and especially unbacked loans between banks, not general lending to homeowners, the vast majority of which are solid.

On the other hand, were I a big bank, I'd be eying buying existing "toxic" debt at cut rate prices, and I can see that drying up credit. Much also depends on just how much bad debt banks are yet carrying... Will this $700 billion be enough that they'll feel secure?

[Midnight Son]

Just because the fed cuts rates doesn't mean that the risk goes down. People losing jobs, businesses going under, etc are still going to happen.

[Joe O'Malley]

Okay, I'm not a professional economist, but I'll give it a shot.



I don't buy the argument that banks "won't lend" -- banks lend/invest, or they die.

True, but banks are limited to being able to lend a certain amount over their asset level. Since no one knows the value of all those outstanding mortgages--housing values continue to fold and defaults continue to rise--banks can't show the asset value to offset their other liabilities. That's a big part of the government buying up those "toxic" mortgages. Less liability=more lending freedom. When all those loans suddenly became question marks on the value books, the banks were effectively paralyzed, basically.

Mortgages to people with solid fundamentals and good credit seems like a reasonable investment even now, despite the "housing crash" (prices weren't inflated where I live, and also haven't crashed -- they've gone up). The problem has been bad mortgages, and especially unbacked loans between banks, not general lending to homeowners, the vast majority of which are solid.

Last word I heard was that some 10% of loans were at risk right now, and that number may (most probably) rise. Most businesses have profit margins under 10%. Right now credit card companies are lowering the credit limits of their customers and sneaking the rates up, because with housing loans so tight people can't get home equity lines to easily pay down credit debt. The effect is spreading. Small businesses, which often rely on credit cards to finance their day-to-day transactions, are at serious risk right now, as are all the recently unemployed who could need to get by for a time by "floating" their credit cards.

Also, it's been reported that anyone under a 700 credit rating right now is going to have a hard time with getting a loan. I'd be surprised if more than 20-25% of the entire country was at that level. I'd be surprised, actually, if the percentage was even that high.

On the other hand, were I a big bank, I'd be eying buying existing "toxic" debt at cut rate prices, and I can see that drying up credit. Much also depends on just how much bad debt banks are yet carrying... Will this $700 billion be enough that they'll feel secure?

The big banks are doing exactly that by swallowing the Bear Stearns and Wachovias out there. And no, the $700b isn't likely to cut it, since this is now rippling globally, and threatening to wipe out years of economic progress in a lot of countries. Additionally, that $700b is going to come in pieces, with $250b to start and more later. We also are likely to have a new treasury secretary in January, so don't look for bold moves from the treasury between the election and then.

[Joe O'Malley]

Jasper, I apologize, I didn't actually try to answer your OP question.

I would talk to a loan agent as soon as possible and dump that ARM. If it's already at 6% you don't stand to lose much if you can refinance off of it. The requirements credit-rating-wise are very steep right now, but it's something I would personally do ASAP. Things are going to be worse before they are better and you don't want to be in a position a year or two from now where you could have dumped it now but maybe not then. We already know that there's no upside for you keeping it, and it can hurt you badly when it kicks in.

(Note, I have no idea how long this will last, but neither does anyone else. This is all new, mega-financial institutions toppling over and not enough smaller financial businesses to take over if they do. This could all get very...interesting in the next year or so.)

[Jasper]

Just because the fed cuts rates doesn't mean that the risk goes down. People losing jobs, businesses going under, etc are still going to happen.
Good point.

[Jasper]

Thanks for the reply Joe!

Despite my "fishing" arguments earlier, that's basically the conclusion I've come to as well, although it's muddied a bit because my credit rating is good, it's more like 5 years before my rate starts to float, and it's not entirely clear we won't move before 5 years... If this proves to be a high point for local housing prices, it might make sense to just sell, net the profit, and buy somewhere that's depressed.

Plus, the Fed just cut to 1.5% (http://rawstory.com/news/afp/Fed_lowers_interest_rates_by_half_a_10082008.html) , so I'm going to hold off a (brief) bit and see what happens.

[shift6]

Only problem is that banks are scared shitless and won't lend, hoarding money. I don't think a rate cut is going to change that.
It will help them start lending to each other. That will feed into lending to consumers. That's how the Fed generally tries to control money supply, and money supply (via hoarding) is exactly the problem right now.

Right, in a logical world, interest rates would be going up steeply because of the risk.
We aren't talking about market-determined interest though, like say on a high-yield corporate bond. We're talking about the locked in rates provided to and between banks only. The Fed doesn't regulate yields on bonds.

Just because the fed cuts rates doesn't mean that the risk goes down. People losing jobs, businesses going under, etc are still going to happen.
Yes. And by freeing up liquidity for lending, new businesses are created, capital investment in current businesses is increased, and both jobs and spending increase.

Jasper: good luck with your ARM. You've got a couple years to figure it out so don't move too quickly my friend. You'll be alright.

[Tim]

I'd grab a fixed rate if you can get a low cost loan (depending on location and amount, could be $2k or so) for 5.5%. Looks like they're close to that now. I shopped at bankrate.com and simple google searches. As your ARM reset approaches, you may want to be less picky about getting a rate that low. I would expect rates over the long term will be a lot higher than they are now (and have been for some years).

But 6% seems high for an ARM. Did you get a lot of kickbacks, have poor credit, or undocumented income? That will keep the best fixed rates out of reach too.

[Jasper]

In hindsight, we just chose a poor time for the ARM, and the rates dropped further. 5.5% fixed is about the point at which I'd jump immediately, but a cursory look showed rates higher than that.

I'm not terribly worried about the ARM. We could survive a considerably higher rate (although I'd have to switch back to a full time paying job), we have little other debt, and I'm not at all afraid to sell the house if the ARM starts to cost more than I like -- we got it for $223k, estimates of it's worth are now near $400k, and I'm sure it'd move at $300k which would still be a nice profit. Mostly I just want to find a better deal, and pay enough attention to have better timing this time around, so I don't end up refinancing again.

[Jasper]

The credit union loan officer we used in the past, who I have good reason to respect, said he was seeing rates at 5.75% for 30 year fixed, and wondered if they might push down to 5.625% or 5.5%.

[Jasper]

Just got an email from the credit union saying "Rates just fell to around 5.375-5.5% (they were at 6.5% last week)".

I'm very tempted to bite, although I need to read a bit more, and think things through. My gut feeling is that they might drop further just before the election.

5.375% fixed would really kick ass though...

[Lorini]

They should drop because the banks will start getting their handouts (I mean bailout) soon and the banks have been admonished to lend the money out. With the Fed already cutting interest rates but no loans being made, maybe getting their handout will start the money flowing again.