Hedging Your Bet on Your Mortgage

We’ve all heard the term “to hedge one’s bet” but do you know what that means?

To do things that will prevent great loss or failure if future events do not happen as one plans or hopes.

 

I’ve received a lot of calls recently from people that purchased or refinanced when rates were near or at their peak in this rate cycle.  They’ve heard that rates have dropped and want to know if they should wait or proceed with a refinance now.

 

An argument can be made to wait and let rates drop further.  And there’s an argument to be made that rates have dropped sufficiently that will allow you to refinance and recapture your costs in about 12 months, depending on the size of your mortgage.

 

In the graph below, I compared a $600,000 mortgage with a 7.125% rate with refinancing at the current zero-point rate of 6.125%.

 

Over a 12-month period you’ll save $4,764.  What would a refinance cost?  Roughly $4,613.

 

Here’s the obvious question:  Where’s the benefit if all I do is break even?

 

Benefit #1 – Recapture Time.

The fact that you can now refinance and recapture your closing costs in 12 months is spectacular!  When I originally became a Mortgage Broker, if you could refinance and recapture your payment in under 60 months, that refinance made sense.  Over the past 2 decades as rates took their slow tumble from 7% to below 3%, if you could recapture your closing costs in 36 months, it was a no-brainer to proceed.

 

 

Benefit #2 – Hedging Your Rate.

No one has a crystal ball and can predict the future.  Locking yourself into a new rate 1% lower, or more, from the rate you currently have is a smart decision.  If rates drop further, you refinance again.  I’ve had clients that refinanced from 8% to 7%, then to 6%, again down to 5%, and yes again to 4% then 3%.

 

 

Benefit #3 – Removing Mortgage Insurance.

If you purchased your home with less than 20% down or obtained an FHA or USDA loan, you’re paying a monthly MI premium.  With the rise in our home values, you could be sitting with 20% equity in your home.  Removing the costly MI would allow you to refinance with less of a drop in your current rate to still make sense.

 

 

Special Note for VA Loans.

For our veterans with VA financing, the Veteran’s Administration has a special program for you.  The Interest Rate Reduction Refinance Loan (IRRRL) allows for a low-cost streamline refinance of your current loan.  There’s no requalification process.  No income documentation is required nor is an appraisal needed.  The only requirements are that you are current with your existing mortgage, you’ve made at least 6 payments on that loan, and the new loan’s interest rate is at least ½% lower than your current rate.

 

 

The concept in today’s article is simple.  A refinance now may be beneficial.  Don’t pay points and keep your closing costs low.  Refinance when the savings you’ll see in your monthly payment will pay back the cost to refinance in a reasonable time frame.  For many of you, you may be thinking you have to wait for rates to drop much further before it is feasible to refinance.  The good news is that today might be your lucky day!

 

If you’d like a no-hassle honest review of your current mortgage to see if a refinance would be a benefit, either email me or give me a call.  My direct contact information is at the top of the newsletter.

 

 

 

Special Loan Program for Lahaina Disaster Victims

Last year in one of the many articles I wrote about solutions for those impacted by the fire, I highlighted a special government program to help those wishing to make a fresh start.  Time is running out, so I thought I should remind you, or pass this along to your friends and family.

 

The Federal Housing Administration (FHA) has a special disaster relief program for those affected by natural disasters, just like the Lahaina fire.  This program is available to not just those that lost the home they owned and lived in, but renters that lost their too are eligible.  Simply put, if you became homeless due to the fire, you could access this program.

 

The FHA 203h program provides 100% financing for disaster victims to buy a new home.  What makes this program different than any other program I know of, is that the replacement home you purchase does not have to be where the disaster occurred.  That’s right.  If you’ve been forced to relocate to another island, or even the mainland, you can use this program to obtain 100% financing anywhere in the US.

 

Qualification for this loan is standard like all other normal mortgage programs.  The maximum loan amount will be based on your income and the maximum FHA loan limit for the county you wish to purchase in.  I’ve seen lenders allow for credit scores as low as 580.

 

This is not a program to rebuild.  It is financing to buy a new home to live in as an owner-occupant.  If you are looking for a fresh start, the FHA 203h program might be the answer.  Normally this program closes after 1 year from the date of the disaster.  The program has been extended temporarily.  If this is something you may wish to take advantage of, do so before it’s too late.

 

 

 

 

 

And now the week’s economic news…….

 

Steady Inflation

The biggest economic report released this week was the inflation data, and it was in line with expectations, causing little reaction.  Beyond that, there were few significant surprises, except that second-quarter economic activity received a small upward revision.  As a result, mortgage rates ended the week slightly higher, but remain near the lowest levels of the year.

 

Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator.  In July, core PCE, which excludes food and energy to reduce short-term volatility, was up 2.6% from a year ago.  This was the same annual rate of increase as last month and the lowest level since March 2021.  While far below its recent peak, it stubbornly remains above the Fed's target of 2.0%.

 

With inflation in focus, the monthly report on consumer confidence published by the Conference Board has been receiving more attention lately, since it may provide hints about upcoming changes in spending habits.  The most recent reading showed a modest increase to a six-month high.  However, labor market conditions deteriorated for the sixth straight month, with the largest number of consumers reporting difficulty finding a job in over three years.

 

Gross Domestic Product (GDP) is the broadest measure of economic activity.  During the second quarter of 2024, U.S. GDP rose at a revised annualized rate of 3.0%, up from 2.8% for the initial reading released last month.  The increase was mostly due to stronger consumer spending, which received a large upward revision from 2.3% to 2.9%.  This data reflects the period from April to June, and investors are watching closely to see if consumer spending is now slowing.

 

 

 

Next Week

Investors will continue to look for Fed officials to elaborate on their plans for future monetary policy.  For economic reports, the ISM national manufacturing index will come out on Tuesday and the national services sector index on Thursday.  The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month.  Mortgage markets will be closed on Monday for Labor Day.

 

 

 

 

Until next week…….