Neighborhood of houses near the ocean on a palm tree lined street. Homes that are for sale have lower purchase rates in comparison to refi rates.

    “The average rate posted on for a 30-year fixed refinance mortgage was 3.39% Monday, well above the 3.14% on offer for a purchase mortgage, according to the personal-finance website.”

    That is a direct quote from this WSJ article about why refi rates are higher than purchase rates.

    As an aside, I love Bankrate’s “average rate” surveys for the same reason I love Freddie Mac’s; they make us look so good b/c our purchase money interest rates are way lower!

    Anyway – the average rate associated with a refinance is now higher than ever compared to purchase rates (about 3/8% difference) and here are three reasons why:

    1. Fannie and Freddie’s new 1/2 point fee. I blogged about this on Friday, but Fannie and Freddie recently imposed a new fee on all refinance loans that instantly made refinance rates at least 1/8% to 1/4% higher than purchase rates.
    2. Refis are “no cost.” Purchase money mortgage rates are usually not quoted with credits for closing costs, while refi rates are almost always quoted with large credits (particularly for “no cost” refis). But credits for closing costs do not come free, as they require lenders to increase their rates to generate additional “yield premium” to cover those credits. Most refinance rates we quote are about 1/4% higher for this reason alone.
    3.  Capacity Issues. A third and major reason refi rates are higher than purchase rates has to do with capacity. Almost all lenders have more business than they can handle right now. All lenders also know that refis will dry up some day while purchases will hopefully continue to roll in. B/c of this, most lenders will prioritize purchases over refis no matter what. Hence, they will increase their refi rates to fend off too much business but not increase their purchase rates in an effort to keep their agent partners and buyers happy and wanting to return.

    Jay Voorhees
    Founder/Broker | JVM Lending
    (855) 855-4491 | DRE# 1197176, NMLS# 310167

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