The Federal Reserve's decision to cut a key interest rate this week was designed to help jolt the sagging economy. It remains to be seen just how well — or how quickly — it will work.
But the rate cut did prompt an immediate burst of activity in the mortgage market. Across the country, mortgage brokers reported a deluge of calls from people wondering whether it was a good time to refinance.
Russell Rothstein, the director of mortgage lending for Beacon Mortgage in Rockville, Md., was one of the people fielding those calls. He tells Michele Norris that a Fed cut to short-term interest rates doesn't always affect long-term interest rates, but the bond market reacted positively to the surprising three-quarter-point drop at first and mortgage rates did go down.
"We saw rates on Tuesday drop from around 5 7/8 percent to around 5 3/8 percent, but then once the market settled down, we actually saw mortgage rates settle back up into the 5 3/4 to 5 7/8 range in the past day," he says.
Even though the rates have rebounded, Rothstein says it could still be a good time to refinance.
"What people have to look at is there is no one specific good time; they've got to look at their individual situation," he says. "Maybe they thought they were going to be in their home for three to five years and now with the values of houses having come down some, they're going to end up staying in their house longer and they want the security of a fixed-rate mortgage."
But he cautions that for those who plan to sell their homes in the next year or two, refinancing may not make financial sense.
"If your payments are going to go down, but the amount that you're going to save is not going to recoup the cost of the refinance, that's where you have to do a break-even analysis," he says. "On the other side, if you have an [adjustable-rate mortgage] that's coming up for renewal right now, even if you're only going to be there for two years — [it] depends how high your rate could go to — then you look at difference in payments."
For subprime borrowers who are carrying mortgages that are worth more than the value of their homes, Rothstein recommends going back to the existing lender.
"They don't want to foreclose; they don't want your property. ... They want their payments, and maybe you can restructure your loan," he says. "With rates having dropped down, it is possible that they may do a loan modification for you and change the terms of it, so that you could afford to stay in your home. You know, everyone thinks that the big, bad lenders want to come and take their homes. The lenders don't want the homes. The lenders want you to be able to make your payments."
Some homeowners who are not subprime borrowers but are struggling to meet their payments could benefit from going back to their lender or shopping around, Rothstein says.
"There are people out there who took adjustable-rate mortgages where the rate is adjusting to higher than what a fixed-rate mortgage is today. So that's an opportunity to either go back to their current lender or to check what's out there in the marketplace. It's very competitive today between lenders," Rothstein says. "And it's important to check who has the best rates, but not only the best rate, because the best rate doesn't always mean the best mortgage. You have to make sure the terms and the closing costs — the entire package — makes sense for you."
Rothstein says it's possible that mortgage rates will soon dip again.
"I think the industry is still expecting a half-percent cut [from the Fed], so I think the mortgage rates will settle down and there's a good chance that they can come back down further," he says. "And I think when people look at these rates, at some point they've just got to make a decision. You're never going to find the bottom of the market. At some point, you just have to decide 'this is where it makes sense for me,' and you have to at that point, you know, move forward."
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