The Fed raised short-term rates again yesterday but rates still remain much lower than expected. Part of the reason is that investors think the rate increases will hurt the economy at this point. As a result, investors moved from stocks to bonds and this demand for bonds keeps rates lower than expected.
In any case, we are locking a surprisingly large number of refinances and there are several reasons why.
JUMBO RATES ARE MUCH LOWER THAN CONFORMING RATES
The most surprising reason people are refinancing is b/c our jumbo rates are 1/2 percent LOWER than our conforming rates, as I mentioned last week. Hence, we are able to refinance many of our “high balance” conforming borrowers (with loan amounts above $484,350) into jumbo loans with much lower rates.
INTEREST RATES 1/4 PERCENT LOWER
This is the more obvious reason people are refinancing, but mortgage rates have surprisingly dropped over 1/4 percent since early November for reasons I have discussed numerous times – weak world economy, tame inflation, and, ironically, the threat of higher short-term rates.
PRIME RATE IS NOW 5.5%
The Prime Rate has climbed over 2% since bottoming out at 3.25% in late 2016. This matters b/c home equity lines of credit are usually tied to Prime Rate with margins of one to two percent or more. As Prime Rate climbs, equity lines become much more expensive. Borrowers in need of cash will sometimes opt for a new first mortgage instead of pursuing an equity line when equity line rates are so much higher than first mortgage rates. In addition, borrowers with large equity line balances already sometimes wish to consolidate their first and second mortgages into a single fixed rate mortgage out of concerns that Prime Rate will continue to climb.
WHO MIGHT CONSIDER REFINANCING?
- Well-qualified borrowers who obtained a “High Balance Loan” in the last year;
- Borrowers with large equity line balances; and
- Borrowers in need of cash.
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