Strategies to combat rising mortgage rates

SANTA CRUZ (May 30, 2009) - With mortgage rates, the rule has always been, 'what goes down, must go up'. We knew it couldn't last; we knew it was coming and now we ask ourselves, have we seen the bottom of mortgage rates? Since December, the government has certainly made a concerted effort to drive mortgage rates down and it has been wildly successful. Though it continues to be committed to purchasing mortgage-backed securities, this refinance boom has been short lived for many.

While it is too early to tell whether mortgage rates are on their way up permanently or if they will be coming back down, we do know that rates shot up an eye-popping one half of one percent in just a few hours on Wednesday afternoon this week. To those of us who track mortgage rates for our clients, that is a huge move and will certainly cause many homeowners who are considering refinancing and locking in a historically low rate to pause. Every refinance boom must come to an end and when it does it leaves a trail of unhappy homeowners and mortgage originators with pipelines that they cannot close.

It will take time to know for sure, but if indeed rates have permanently moved up, refinancing homeowners and homebuyers can permanently buy the rate down by paying more in points. For example, if the 30 year fixed rate, at a loan origination fee of one point ($4,000), is 5.25 percent, a borrower could pay two points or more in order to get the rate down to, say, 5.00 percent or lower. To translate, for a $400,000 loan, paying an extra point, or $4,000, will lower the monthly principal and interest payments from $2209 to $2147 for a savings of $62 per month. Over the entire 30 years, this savings amounts to $22,300 in interest. Paying the extra $4,000 could make sense.

Homebuyers should not be shy about asking the seller to help by paying the extra points in order to offer the borrower a below-market interest rate. This is not a bad strategy for sellers and listing agents to advertise when attempting to attract buyers to their property.

Besides paying more in points, borrowers may realize that their goal of obtaining a rate under 5.00 percent may be more an emotional decision than a practical one. After all, the difference between paying $2209 a month and paying $2147 is relatively minimal in the overall scheme of things and should not preclude a prospective homebuyer from becoming a homeowner. Keeping that extra $4,000 in pocket may be more important right now. Also, we all need to realize that mortgage rates between 5.00 percent and 6.00 percent is an incredible gift that will not be around indefinitely. It is still not too late to take advantage of great rates!

This column is written every Saturday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.