- The Washington Times - Friday, February 13, 2009

While mortgage rates remain low, volatility is still the buzzword. It seems lenders are turning the faucet on and off in reaction to the most insignificant economic news or slightest jump in volume. Lenders are as skittish an alley cat. Here’s an update.

The ability for a homeowner to take a slightly higher interest rate and forgo closing costs - a strategy I have been recommending for years - is, for all practical purposes, gone. Traditionally, a borrower could choose an interest rate that would carry zero closing costs. This rate is usually slightly higher than a rate with no points and closing costs. On a $400,000 loan secured to Virginia property, closing costs will total somewhere near $4,000. My argument has been that in most cases, taking the higher tax-deductible rate with no closing costs is better.

As of this writing, I see that I would be quoting a 30-year fixed-rate loan with no points at about 5.50 percent. The zero-cost rate would traditionally be close to 5.75 percent. Not anymore. My best zero-cost rate is now north of 6.25 percent, which is too high for most folks looking to refinance.

The explanation of how the zero-cost refinance works is simple. The lender simply pays the mortgage broker a bigger fee as the interest rate rises. Instead of the broker taking the entire fee, the broker uses it to pay some (or all) of the borrower’s closing costs. The problem is that today lenders aren’t paying brokers a “yield spread premium” that’s large enough to cover the borrower’s costs unless the rate is far higher. While lenders like the idea of a higher-note rate, they apparently aren’t comfortable with forking out a ton of cash for it.

What does this tell me? It tells me that lenders are worried that these loans will be paid off early, making the costly high-rate loan unprofitable. Does this mean lenders are predicting lower rates and a future refinance wave? It’s hard to tell. Skittish is the word that comes to mind.

There’s another sign indicating the level of lenders’ paranoia. They are afraid of committing an interest rate for a long period of time. When a consumer applies for a mortgage loan, he or she is given the choice to “lock” or “float” the interest rate. Locking the rate means that the rate is guaranteed as long as the loan closes within the lock period, usually within 45 or 60 days.

If the borrower chooses to float the interest rate, he or she may take advantage of a fall in rates. However, the borrower is not protected if rates rise. My advice has always been to lock the rate and be done with it. Floating is akin to playing the slots in Atlantic City.

For the first time, however, I am suggesting that certain refinance clients float the rate. I have a couple of very compelling reasons for this reversal.

First, the influx of mortgage applications, combined with fewer processors in the business has created a bottleneck. It’s taking at least 45 days to close a refinance. In order to protect my clients, I have to lock a rate for 45 or 60 days.

Second, the difference in rate between a short-term lock and a longer lock is far wider than usual. A 15-day lock usually carries a rate of only about 1/8 percent lower than a 60-day lock. Today, I see that I could lock a 30-year fixed-rate loan for 60 days at 5.50 percent. If I were able to process and close the loan in 15 days, requiring only a 15-day lock, my rate would drop to 5.125 percent, a 3/8 percent difference.

For folks who are in the market to refinance, get your applications in and allow your mortgage broker to get the paperwork done. When the loan package is ready, the broker merely needs to lock the rate for a period long enough to get it out of underwriting, resulting in a better rate.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.

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