Wednesday, September 5, 2012

Can Interest Rates Get Any Lower?

Short answer, not really.  So if you’re waiting for interest rates to bottom out before you buy or refinance a home, you may just miss the boat!  Here’s a short lesson in how consumer mortgage interest rates are determined and why it’s not likely that they will go lower.

Mortgages are backed by bonds.  The lowest coupon currently available for a Fannie Mae MBS (Mortgage Backed Security) is the 3.00% FNMA bond.  Fannie Mae will pay the company that agrees to service (collect payments, pay out escrows, etc.) these loans an additional .25%.  Plus for the service of guaranteeing these loans against default, Fannie Mae will charge and keep a .25% Guarantee or “G” fee.  If you add all this up, you get a minimum consumer rate of 3.5%.  This means that the lowest currently available zero point 30 year fixed rate is 3.5%.  This rate goes to borrowers with high credit scores and a low loan-to-value ratio.

You can, however, get a lower rate by paying “points”.  1 point is 1% of your mortgage amount and at present that 1 point will lower your rate by about .125%.  If you decide to pay 4 points to buy your interest rate down to 3.00%, that is as low as the rate can go.  A Fannie Mae 2.50% bond does not currently exist which would support 30 year mortgage rates lower than 3.00%.  In addition, there is no evidence that investors who routinely purchase Fannie Mae MBS would be willing to continue those purchases if the coupon rates on those bonds declined to 2.50%.

So it would be detrimental for a consumer to delay refinancing or purchasing today because they are waiting and hoping that mortgage rates will decline further.  Today, they simply can’t.  Call me at 734.238.3MTG (684) to start your pre-approval or go to my website for more information –  I’d love to help you start saving money!

Peggy Wilson
Senior Mortgage Banker
2395 Oak Valley Drive, Suite 200
Ann Arbor, MI 48103
Phone: 734.238.3MTG (684)
Fax: 734.669.6559
MI Mortgage License #133950

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