help my mom refinance her home?
January 16, 2008 5:14 PM   Subscribe

Assuming that the feds are indeed going to cut rates significantly at the end of this month, should my mom wait until after that to refinance her home mortgage?

My mom is about to refinance her home loan -- but with all the talk of the feds cutting rates, it made me wonder if she should wait?

If the feds cut rate, will it affect the offered rate on her loan? Is there a delay between these two numbers? Or can she walk in the next day after the prime is cut and get a different rate?

Also, she is sure she is selling the house within 2 years (this refinancing is designed entirely to get her a lower monthly mortgage for those two years)... should she worry about loans other than 30-year fixed? Or are they full of hidden problems and complications?

Backgrond info: she has above average credit (but not amazing... just low-good), her loan is currently around $30k, and the latest valuation of the house is around $700k, her current interest rate is roughly 9%
posted by robotdog to Work & Money (12 answers total)
 
on a loan of only 30K, make sure that she won't end up losing money due to closing costs. Figure out how much she'll spend over the next 2 years at the current rate, then do the same thing for the new rate and add any closing costs. I'll bet it will be pretty close.
posted by cosmicbandito at 5:44 PM on January 16, 2008


If she's only going to be in the house for another two years, are the two of you positive that the monthly savings on the mortgage (x24) will outweigh the costs of the refinancing (also taking into account the gains that could be earned from investing that money for two years)?
posted by Doofus Magoo at 5:45 PM on January 16, 2008


According to the news, the Fed may cut the rate by .25 - .75% at its next meeting on Jan. 29-30. .75% seems pretty high to me. This is a real cut, and generally has an effect on rates pretty quickly. Rates should already reflect the anticipated cut, to some extent, since so many borrowers will be waiting.

She might want to reconsider waiting to sell. Prices are falling in most markets, and there's no assurance they will rise again promptly. Disclaimer: I just bought a new house, and am selling the current house, so I have confirmation bias.

"Should I refi" calculator . You don't say how much time is left on the mortgage, but stretching a mortgage with 5 years left on it, out to 15 or 30 years is bad budgeting. It's a lower rate, but still more interest becasue the term is longer.
posted by theora55 at 5:55 PM on January 16, 2008


She could get a home equity line on the house at a much lower rate than 9% and pay off the existing $30,000, essentially replacing that debt with a debt on the home equity line. There are many no cost home equity lines out there, probably some through her current lender, that don't charge any refinancing fees or trigger closing costs. You could consider it a lateral move really, but it doesn't make a huge amount of sense to refinance now if she is selling soon and only owes $30,000 on that loan. She could do an adjustable rate that would drop if the rates drop (and it will rise when rates go up, too).
posted by 45moore45 at 6:17 PM on January 16, 2008


Mortgage rates aren't directly affected by Fed rates. They are more of a reflection of the demand for loans versus the available capital to make the loans.

Check out this graph for an old example. The fed rate went up, but the mortgage rates trended down:

http://bigpicture.typepad.com/comments/images/mortgage0506_1.jpg

http://en.wikipedia.org/wiki/Federal_funds_rate

http://en.wikipedia.org/wiki/Federal_Home_Loan_Mortgage_Corporation
posted by gjc at 6:38 PM on January 16, 2008


oops... i meant to say the loan is for $300k.. not 30.... she's had the house for like 6 years...
posted by robotdog at 6:58 PM on January 16, 2008


Stick with a 30 year fixed. Its a buyer's market and you don't know how long it will take to sell the property. I've seen a lot of people go with rates fixed for only two or three years because they were planning on selling only to have things go off course for some reason. A 30 year fixed rate based on today's rates would save a lot on the monthly payment.

I wouldn't wait on the feds. The prime rate is only one indicator for mortgage rates. Start saving money on the monthly payment now.
posted by curlyelk at 7:40 PM on January 16, 2008


As gjc pointed out, mortgage rates aren't directly affected by Fed rates. Mortgage rates are influenced by the expectation of future inflation. In the current economy when the Fed lowers the federal funds rate there is some expectation that this will increase the risk of inflation so it is just as possible that mortgage rates could go up. There is really no way to accurately predict the future of mortgage rates.
posted by JackFlash at 9:34 PM on January 16, 2008


Rates have declined quite a bit over the past year or so. Refi now to lock in that and refi again if/when it makes sense. ARMs don't offer any value these days, so 5% fixed 30 is the target rate to shoot for.
posted by panamax at 10:38 PM on January 16, 2008


Oh, also check out fixed 15. Those are available at about a point less than the 30s.

I like the rate search at eloan.com. Pretty transparent and easy to use, but dunno how on-the-up it is. Here's their rates / points / payment ratesheet for 30yr fixed:

5.125% 2.341% $1,633
5.250% 1.763% $1,657
5.625% 0.792% $1,727
6.125% $558 Credit $1,823

And come to think of it, if you're only keeping the house for a year or two paying points isn't a savings.
posted by panamax at 10:45 PM on January 16, 2008


Assuming that the feds are indeed going to cut rates significantly at the end of this month, should my mom wait until after that to refinance her home mortgage?

Making that assumption that you mention, then, yes she should wait. Mortgage rates are tied to the Fed-determined interest rates, because those rates determine the lending bank's cost of capital.

Also, she is sure she is selling the house within 2 years
the latest valuation of the house is around $700k


Does she have a buyer lined up already? I doubt it. See, this is the hidden complication: the way you've described it is not how home sales work. You should not be "sure" you are selling the house and you certainly should not be sure you are selling it for a given price. That makes too many assumptions that things will go perfectly, but a house-selling transaction does not always go perfectly for the seller.

The person who will buy your mom's house is "sure" she'll be getting a great deal, below market value for a great house. So don't go making any assumptions about selling the house in the future - and when you refinance, make sure you plan for the worst-case scenario, for example that it takes a year longer to sell the place than you thought (maybe the roof caves in during a rainstorm and the place requires significant renovations, during which time it's unsalable.)
posted by ikkyu2 at 6:39 AM on January 17, 2008


Mortgage rates are tied to the Fed-determined interest rates, because those rates determine the lending bank's cost of capital.

This is not correct. Mortgage rates are only indirectly tied to Fed rates and often they go in different directions. The Federal Funds Rate does not determine the bank's cost of capital. The money that the bank lends comes from customer deposits in savings and checking accounts, not the Fed. The bank loans out most of the money deposited but is required to keep a reserve of about 10% of deposits at all times to cover potential customer withdrawals. On a daily basis the bank's reserves may go slightly below this required reserve limit and the bank must borrow the difference over night. This is due to the ebb and flow of deposits and loans. It can borrow the daily difference from another bank which has a daily excess or borrow it from the Federal Reserve. But this borrowing represents only a tiny fraction of the total money lent out -- a fraction of the 10% reserve. It does not affect the rate on mortgage lending. It does affect the rate on short term loans of two years or less. Most of the time the bank doesn't need to borrow from the Fed at all as long as its reserves are above the required minimum.

Mortgage rates are determined by the expectation of inflation. The mortgage rate is the current short term lending rate -- 1 year T-bills -- plus or minus the expected inflation over the life of the 30-year mortgage. Therefore it is the expectation of inflation that has the greatest influence on the mortgage rate, not the Federal Funds rate. Over long periods of time, say one or two years, if the Federal Funds rate continually drifts up or down, mortgage rates will also drift up or down, but on a month to month basis nobody knows which direction mortgage rates will go. Frequently the Fed rate and mortgage rate go in opposite directions because when the Fed lowers interest rates, it is in order to spur the economy which can lead to greater inflation. Greater expectation of inflation means the banks must charge higher mortgage rates even though the Fed rate goes down.
posted by JackFlash at 8:54 AM on January 17, 2008


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