If you're contemplating a home refinance the Fed's exit from buying mortgages (MBS) this October will affect mortgage rates.
The purchase and sale of MBS is directly responsible for mortgage rate movement. Demand for MBS causes mortgage rates to decline whereas weak demand for MBS causes mortgage rates to rise.
Economic news influences investors to buy or sell their MBS investments. When there is positive economic news investors typically sell their MBS in favor of higher paying stocks. When there is negative economic news, investors buy MBS as a safer investment.
The Fed has been artificially keeping mortgage rates low by consistently buying large blocks of MBS. This October the global markets will decide if they have an appetite for MBS. If they don't you can expect mortgage rates to rise.
Homeowners who have a fixed rate mortgage have fixed consistent payments. If you have an adjustable rate mortgage a refinance prior to October might be a good idea. Although pure speculation, mortgage rates are predicted to rise due to recent consistent economic reports that show the US is finally pulling out of a recession.
The MBA Mortgage Finance Forecast predicts robust growth in new housing and existing home sales as well as increasing home prices. It's likely that investors will shy away from MBS investments and buy higher yielding stocks as company profits increase and applications for unemployment insurance decrease.
If you refinance after October, additional money called discount points can be paid to reduce the interest rate. Refinances to pay of debt are often a benefit even in a rising interest rate market and I would not be surprised if pre-payment penalties are once again offered in exchange for a lower interest rate. Note: In this case, a loan without a pre-payment penalty must also be offered.
What is surprising to many people is that they can refinance into the same rate or a higher rate and their payment can be lower. This is particularly true if they have been paying on their home loan for several years.
This is because with each payment you are making a principal payment and thus you would be refinancing a lower loan amount and re amortizing the loan payments. This is assuming you do not have an "Interest Only" loan and that you are refinancing into the same original loan term as you had before.
Example would be if you are in a 30 year fixed rate loan you would be refinancing into another 30 year fixed rate loan. A shorter loan term would likely cause your payment to rise even if the rate was lower. The best way to know if a refinance makes sense is to speak to a licensed mortgage loan officer.
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