Trump tantrum as the media would like to call it. Two weeks since Donald J. Trump’s ascension to the U.S. presidency and we’ve seen a mortgage rate rising to almost 4%. The Federal Reserve is also expected to raise interest rates sometime in December.
With all this brouhaha, where do consumers stand? What shall they do? Should they refinance now while the rates are still record low? Should they assume a wait-and-see stance and hold off any plans to refinance or purchase a new home?
Mortgage Rates Up, Applications Down
As of November 17, 2016, the 30-year fixed-rate mortgages averaged at 3.94% compared with the preceding week’s 3.57%, according to Freddie Mac. Fifteen-year fixed-rate mortgages averaged 3.14%, up from 2.88% of the previous week. The average rate for 5/1 adjustable-rate mortgages rose to 3.07% from 2.88% recorded the previous week.
“This week, the verdict is in — over the last two weeks the 30-year mortgage rate jumped 40 basis points to 3.94 percent, almost identical to the 39 basis point increase in the 10-year Treasury yield.
“If rates stick at these levels, expect a final burst of home sales and refinances as ‘fence sitters’ try to beat further increases, then a marked slowdown in housing activity,” Sean Becketti, who serves as chief economist at Freddie Mac, said in the latest Primary Mortgage Market Survey.
David H. Stevens who sits as chief executive officer of Mortgage Bankers Association echoed the same sentiment in a November 16 press release, “Following the election, mortgage rates saw their biggest week over week increase since the taper tantrum in June 2013, and reached the highest level since January of this year.”
Per MBA’s latest weekly survey, mortgage applications dropped 9.2%, on a seasonally adjusted basis, compared to a week earlier. The MBA survey also found these week-over-week trends:
- The refinance index dropped to 11%, at the lowest level since March 2016.
- The purchase index also decreased 6%, at the lowest level since January 2016.
- Refinancing activity dropped to 61.9% vis-a-vis the previous week’s 62.3%.
Keith Gumbinger, who serves as vice president at HSH.com in a Yahoo Finance interview, however believes that rates have been on the upswing in anticipation of the Fed rate hike and mortgage applications have been on a decline since June or July. It was the election, said Mr. Gumbinger, that effectively gave them a push.
Rate Hike “Relatively Soon”
The election may also be the final shove for the Fed to raise the federal funds rate, an important bank lending index, in December. In a testimony before the U.S. Congress, Federal Reserve Chair Janet Yellen said, “… an increase could well become appropriate relatively soon if incoming data provide some evidence of continued progress toward the Committee’s objectives.”
However, the Fed may back out of its plan if it sees the effect of tightening financial conditions as a result of the rate hike to the overall global economy.
Should You Be Worried?
The refinancing boomlets that Brexit paved the way for seem far behind us now. And unlike home purchase rates, refinances are most sensitive to any rate spike or tumble. Simply because it makes no sense to refinance to a higher rate.
But if it’s any consolation, mortgages as they stand now are still better than they were years past. Per historical data on November 12, 2015, the 30-year FRM had an average rate of 3.98%, the 15-year FRM 3.20% and the 5/1 ARM 3.03%.
If you have a mortgage rate of 5% and higher, it still makes sense to refinance to current rates of 4%. Remember the 1%-reduction rule in refinancing. Although a less than 1% reduction can benefit you if you’re paying for private mortgage insurance, etc. Refinance remains a case-to-case basis so examine your financial affairs vis-a-vis the current market conditions.
The same is true with home purchase loans. You have to consider your credit, down payment and debt-to-income ratio to qualify for the best rates.
Against this backdrop, it’s up to you decide whether now is the ripe time to refinance or wait for the next wave of lower-than-usual rates.