May 25, 2024

Mortgage Rates Surge Upward – Is The Refi Boom Over?

Mortgage Rates Up Sharply Over Past Week

Mortgage rates increased again today as the sell off in the long treasury market continued.  The all time lows in the mid 4% range have quickly disappeared.

A short week ago the best borrower could obtain a par rate of 4.5% – see All Time Low Mortgage Rates.   Today that same borrower  is looking at a rate of 5.25%.    Borrowers who have applied for a refinance and did not lock the rate are in for a payment shock.  On a $250,000 loan, the payment increases by $1368 per year on an increase from 4.5% to 5.25%.  Higher rates and tougher underwriting standards are beginning to stop the mini refinance boom dead in its tracks.

Despite the large recent increase in mortgage rates, keep in mind that the Federal Reserve is determined  to do whatever it takes to bring mortgage rates lower.  Whether or not the Fed will succeed in lowering rates is unknown.

Lower Rates Still Possible

Factors that may ultimately bring mortgage rates to 3.5% or lower include the following (See –  Is 3.5% Possible?)

The Federal Reserve’s direct purchases of mortgage backed securities initiated late last year was successful in its goal of lowering mortgage rates.   The Fed’s direct purchases of MBS has stabilized the mortgage market and lowered rates.  There are arguments being put forth that due to the Fed’s intervention, mortgage rates have artificial price support.  Nonetheless, if the historical yield spread between the bond and the 30 year mortgage is re-established, we may see a 30 year fixed rate in the 3.5% range.  Something to think about for those contemplating a mortgage refinance.

The question of whether the Fed is manipulating mortgage pricing at this point or how long such price support can last is somewhat irrelevant.  The major fact to keep in mind is that the Fed appears to be relentless in its campaign to drive down mortgage rates.   If the Fed can stabilize the MBS market we may be looking at mortgages rates in a range we never thought possible a short time ago.

30 year fixed rate mortgages in the mid 3% range would cause a huge refinance surge.  Keep in mind that over the past five years, homeowners had multiple opportunities to refinance in the low 5% range.  Unless the borrower is taking cash out, it usually does not pay to refinance for less than a one percentage point reduction.   At 3.5% rates, it would make sense for almost every homeowner with a mortgage to refinance again.

If rates do move into the mid 3% range or lower, the benefits will arguably go to those who need it least.  Based on present underwriting standards, those with poor credit, late mortgage payments, no equity or insufficient income need not apply.  The sad irony here is that the Fed’s costly efforts to reduce rates may do little to benefit the economy or the majority of homeowners.  (See All Time Low Mortgage Rates for A++ Borrowers Only)