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Mortgage Rates are Dropping, but Fees are Rising

Low mortgage rates have forced me to consider refinancing my mortgage despite closing not too long ago in October of 2008. I was recently contacted by a Wells Fargo representative (who current services my loan) regarding a request I made about refinancing my mortgage. He did a great job explaining the situation and current mortgage rates, and even went so far as to point me in the direction of a very interesting article. The article states that mortgage rates are dropping, but at the expense of increasing closing costs and fees.

Article: Rates are low, lending standards are really tight. Even with a great credit score you might have to pay points to secure the best rates.

Opinion: This really is unfortunate, but it’s easy to understand where this is coming from. Lenders got burned with poor lending practices, and now they are overreacting. I imagine we will see a loosening of these lending practices in the future, but probably not soon enough to obtain the low rates of the present. Let’s just hope that everybody remembers what happens when you allow subprime lending in the far-out future. We are a people that forgets rather quickly.

Article: Fannie Mae and Freddie Mac are moving towards a risk-based pricing structure by using fees. The new pricing structure will be implemented in April, but lenders began implementing them into rate sheets in mid-January.

Opinion: This fee based pricing structure is supposed to prevent unqualified borrowers from securing a loan. This added measure of tightening lending practices will prevent the people most in need of refinancing from securing a loan. I would love to be able to refinance my loan to a lower rate, but it’s not crucial for me to do so. A co-worker of mine had his house foreclosed because he couldn’t afford the mortgage. A lower rate would have certainly helped him. I don’t know of a better system, but those most in need are the ones who are going to be hurt the most.

Article: The average rate is acquired by paying 0.7 points. The decision to pay points is based on how long the borrower will be owning the property. 1 point on average lowers your rate by 0.625% to 0.875%.

Opinion: A local mortgage lender offered me the following rates: 5.375% (0 points) and 5.125% (1 point). It looks like my 1 point is not as valuable as the points described in the article. The difference in closing costs between paying 0 points and 1 point was $2,200. The difference between the monthly payments was a mere $34.85. The break even point would be 63 months or 5 years and 3 months. I’m planning on staying for about 5 years, the extra $2,200 up front to MAYBE break even is a terrible deal and that’s not even taking into account the time value of money. Definitely calculate your own break even point when deciding whether or not to pay points.

Article: Whoever currently holds your loan might provide you with the lowest fees.

Opinion: I don’t necessarily have an opinion on this, but I do have some recent experience that justifies the claim. My closing costs through Wells Fargo would have been $1,500 and at a local mortgage lender they would have been $2,100. It is important to take into account that the rates were different with no points, 5.675% and 5.375%, respectively.

Final Thoughts

The article is definitely worth a read if you’re in the market for refinancing. From what I can tell, refinancing is some what of a crap shoot. I’m going to try to stay informed, but the great quote from The Big Lebowski sums up the mortgage rate game the best, “sometimes you eat the bar, and sometimes the bar eats you”.

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