Mortgage Rates Spike: Here's Why You Can't Re-fi

While you were preparing for the holidays, you may not have noticed that interest rates have gone up. In fact, the 10-year treasury prices have plunged and yields have increased a full percentage point in just six weeks-from about 2.5 percent to 3.5 percent. Here are the basic reasons why rates have popped:
  • Institutions selling bonds after QE2 and tax deal announcements: When Bernanke was hinting about his bond-buying spree (QE2) over the summer, the big money bet on about trillion dollars of Fed purchases. Accordingly, the sheep bought bonds like crazy. Even when the plan was announced, there was room for more than $600B. But when the tax cut deal emerged, it seemed more likely that the plan would be capped at $600B because a portion of the tax cuts would stimulate the economy next year.
  • Investors selling: Investors who fear future inflation are selling bonds, because rising inflation means that your annual interest payment from the bond is worth less every year that you hold the bond. There are also a bunch of people who are dumping bonds because they are chasing stocks higher
Here's how all of this bond market mayhem translates to the mortgage market: mortgage rates have spiked from a low level of 4.25 percent for a 30-year a couple of months of ago, to nearly 5 percent today!

Rising mortgage rates is causing apoplexy among those seeking to refinance. All of the borrowers who were waiting for mortgage rates to drop "just a little lower" are now squealing. According to mortgage maven Michael Raimi, President of WCS Lending, would-be borrowers keep telling him that they want to wait until rates drop back under (fill in the blank). Mike says, "What they don't realize however is that rates may not be at record lows but they are still at historic lows."

Yes, we are pigs...5 percent is not good enough, when we could have grabbed 4.25! Amazingly, locking-in a 5 percent loan is still a good deal for lots of people on a cash flow basis. For a $200,000 loan, it will cost you an extra $90 per month, but if your current loan is about to adjust or your monthly cost still improves by refinancing, then do it!

Here's what you need to do if you are planning to refinance:

According to Raimi, these are some of the mistakes people make when applying for a re-fi:
  1. People don't realize how long and arduous the process can be and bail because it's too much of a pain in the neck
  2. Self employed borrowers overstate their income (ahem, what you pay Uncle Sam is what the lender cares about!)
  3. Owners overstate the value of their home (appraisers usually bring them back to reality)
  4. Borrowers elect to float the rate assuming that rates will improve
  5. Borrowers assume a big name bank is always better, only to find out too late in the process that the bank can't deliver the deal promised
The economy may be improving, but that doesn't mean lenders have loosened their requirements. Raimi notes, "A Few years ago we were at one extreme where securing a mortgage was easier than getting a drivers license. The pendulum has swung to the other extreme- a process that used to take 30 days is now 60-90 days and significantly more labor-intensive for the borrower. The good news is that if you can meet the guidelines, than you will ultimately be approved, but it wont be fun."

Image by Flickr User lotyloty, CC 2.0