Setting a Refinance Rate Target

Rates are finally going in the right direction.  When you should refinance and how to capture the lowest rate is what we’ll discuss today.

 

Rate Delta:

Let’s first discuss how much rates need to drop in order for a refinance to make sense for you.  There is no set differential in rate that determines when you should refinance.  What you’ve heard that you should only refinance if rates drop 1% or 2% below your current rate is not correct.  If I could only convey one concept that sticks with you today, it should be:

 

The reduction in interest rate for a refinance to make sense is determined by your loan amount.

 

The concept is simple.  The larger the loan, the smaller the rate reduction needs to be.  That’s because with a larger loan, you’ll see a bigger change in rate than a smaller loan with the same reduction in rate.  Here’s an example:  An $800,000 30-Year mortgage at 6.000% has a monthly payment of $4,796.  Drop that rate ½%, and the payment drops to $4,542, a savings of $254 per month.  A $200,000 30-Year mortgage at 6.000% has a payment of $1,199.  Drop the rate ½% and that payment is $1,135.  That’s a measly $64 per month.

 

How much of a change in monthly payment is sufficient?  That’s a personal question that only you, the borrower, can answer.  Over the years I’ve refinanced thousands of clients.  Each has a unique financial situation.  I presented a refinance option to a client that would have saved him $400 per month and was rejected because for him, the hassle wasn’t worth savings.  Yet I’ve had others with limited income see a reduction of $125 per month, and that drop made a huge difference in their quality of living.

 

You are the only one that can determine how much of a monthly savings makes a refinance worth doing!

 

 

Rate Target Strategy:

Now is the time to determine how much of a reduction in rate makes sense for you to pull the trigger on a refinance.  Don’t wait until you think rates are there to start the process.

 

 

Above is a graph of the past 6 months of the 10-Year US Treasury Note.  While the yield has dropped from its highs in April, you can clearly see that the drop is not a straight line down.  There’s lots of seesawing up and down along the way.  Unless you track rates daily like I do, there’s no way a consumer is going to know when the peaks happen, and when we’ve hit another valley.

 

Your best strategy to obtain the best rate available is to determine your target rate for a refinance.  You can’t get away with “I’ll wait for the lowest rate” because the rate offered yesterday may have been lower than today’s.

 

You should talk with a mortgage professional to determine the costs of a refinance and establish a target rate that makes sense for you – giving you a monthly savings that you feel is beneficial for you.  Once you’ve determined what that target rate must be, at a minimum, it is our job to monitor rates and let you know when to jump into action.  It is no different than setting a buy or sell order for a stock.

 

Not Your Last Refinance:

While rates are projected to drop in the near future, no one knows how far, nor how long it will take.  Don’t make the mistake of saying you won’t do anything until rates get back to the historic lows of 2021, as those days may never be seen again.

 

For most people, the strategy should be to look at rate reduction as a series of bites at the apple, versus one large chunk.  If we we’re assured that rates would drop in a straight line, the math says to wait.  What if rates hit 5.000% and stay there for a while?  No matter what the Fed does, if the government keeps printing money, inflation will remain, and mortgage rates will not drop much – they could even rise again.

 

That’s why the strategy of determining when a refinance makes sense first is a better approach than just waiting for some rate that may or may not ever be available.  We can do a deep dive into the math, but getting a decent first reduction in a refinance and enjoying that lower monthly payment is a better approach than keeping a higher rate and payment for longer than necessary.  After you refinance and rates drop further, there’s nothing stopping you from refinancing again.

 

With this in mind, you should always look at refinancing for the lowest costs possible and not pay any points.  As part of determining your refinance target rate, you need to look at the total costs of the refinance and the time it will take to recoup those costs in your lower monthly payment.

 

 

 

 

New 2025 Conforming Loan Limits – For Some!

Every year the government agency that oversees Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA), sets the limit for the maximum dollar amount for a loan they’ll purchase.  That dollar amount is known as the Conforming Loan Limit.  The way they determine what next year’s amount will be is based on how much home prices have increased from the previous year.

 

FHFA has not announced their calculation for the increase in home prices nor have they set the new conforming loan limit.  FHFA usually makes their announcement in November.  But one large national lender isn’t waiting around.  Using data from CoreLogic, they’ve calculated FHFA will increase the loan limits by 4.71%.  For Hawaii, that will increase our maximum conforming loan amount to $1,203,975.  That’s up from 2024’s limit of $1,149,825.

 

In Hawaii you can now buy a home for $1,250,000 and put just 5% down and get a Fannie/Freddie conforming loan.  But again, not every lender is offering the new higher loan limit.  Check with your lender to see if they can honor that amount now.  I am happy to report that Hawaii Mortgage Company does broker to that big national lender and can offer it today to our clients.

 

 

 

 

Additional Comments on Last Week’s Jobs Data

I am blessed to have subscribers that do a lot of research and investigation on their own and share their findings with me.  Christopher wrote me last week with some shocking data from the BLS that explains why so many people are feeling like our economy is sputtering yet the government data doesn’t look that bad.

 

When looking at data for the last 12 months, from August 2023 to August 2024, the BLS report says those employed (non-military) decreased by 79,000 people.  The BLS breaks those numbers down between foreign-born workers and native-born workers.  When breaking out the numbers between the two groups, foreign-born employed workers increased by 1,240,000, while workers born in the US saw their number of employed drop by 1,319,000.

 

 

Here’s the definitions used by the BLS for each class of worker:  NOTE: The foreign born are those residing in the United States who were not U.S. citizens at birth. That is, they were born outside the United States or one of its outlying areas such as Puerto Rico or Guam, to parents neither of whom was a U.S. citizen. The native born are persons who were born in the United States or one of its outlying areas such as Puerto Rico or Guam or who were born abroad of at least one parent who was a U.S. citizen.

 

Before I get accused of being a xenophobe, I’m just reporting the data our own BLS publishes.  While it is true that many in the foreign-born category are now US citizens, it seems very strange that in 12 short months we replaced 1.3 million workers that were born in our country with 1.24 million that were not.

 

Just something to consider.

 

 

 

 

 

And now the week’s economic news…….

 

Inflation Matches Expectations

The most significant economic data released this week focused on inflation, and the results were very close to the expected levels.  The European Central Bank meeting also revealed no major surprises.  Mortgage rates declined a bit more to the lowest levels since early 2023.

 

Each month, the Consumer Price Index (CPI) is one of the most highly anticipated inflation indicators.  To reduce short-term volatility and get a better sense of the underlying inflation trend, investors often prefer to look at core CPI, which excludes food and energy.  In August, Core CPI was 3.2% higher than a year ago, the same as last month, remaining near the lowest annual rate of increase since April 2021.

 

Although this annual rate is down significantly from a peak of 6.6% in September 2022, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed.  Shelter (housing) costs were 5.2% higher than a year ago and continued to be a primary reason why inflation remains stubbornly elevated.  By contrast, several categories posted declines in July including used car prices and medical care services.

 

 

Look at this breakdown of what comprises core inflation.  Shelter represents 45.7% of core and motor vehicle insurance is 3.7% of core, that totals 49.4% of the inflation pie.  All other components represent 50.6% of the pie.  Of the 3.2% annual inflation rate, if you were to remove the portion that represents shelter (2.38%) and motor vehicle insurance (0.62%), everything else in core inflation comprising the 3.2% of annual core inflation is just 0.2%.

 

Another significant inflation indicator released this week which measures costs for producers also was essentially in line with the consensus forecast.  The core Producer Price Index (PPI) was 2.4% higher than a year ago, the same annual rate as last month.  Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

 

At its June meeting, the European Central Bank (ECB) implemented its first rate cut since September 2019.  On Thursday, the ECB again reduced benchmark interest rates by another 25 basis points, as expected.  The statement released after the meeting continued to emphasize that future monetary policy decisions will be based on incoming economic data, while providing no specific guidance.  Investors anticipate that there will be one more 25 basis point rate cut by the ECB before the end of the year.

 

 

 

Next Week

The next Fed Meeting will take place on Wednesday.  Most investors expect a 25 basis point rate cut, while some anticipate a larger 50 basis point reduction.  For economic reports, Retail Sales will be released on Tuesday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.  Housing Starts will come out on Wednesday and Existing Home Sales on Thursday.

 

 

 

Until next week…….