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Mortgage Rates–the real story

falling mortgage ratesIf you own a home today, you are almost certainly being subjected to an avalanche of direct mail urging you to refinance your mortgage. Ads on the radio and TV are in your face constantly, making the same pitch.

If you’re like most people, you tune them out.

Now may be the time to act. Here’s why: First, you should understand how lenders determine the rates they offer. Almost all loans are sold on the secondary market; Fannie Mae and Freddie Mac are the two largest investors in these loans. They pool those millions of home mortgages into a type of bond called a Mortgage Backed Security (“MBS” for short), which is then traded on Wall Street like any other bond.

When there is high demand for the MBS, the price goes up. When that happens, rates drop–because the banks issuing the mortgages can now sell them to the investor for a higher price. The banks pass that improvement on to you, the consumer.

The chart below shows what the MBS have been up to since December 30 of last year. The green bars represent those days when the MBS price increased, the red ones, when it declined.

Do you notice a trend?

MBS rally

To put this into perspective, because of the long rally in bonds, we have seen mortgage rates drop  significantly. What’s significant? Here’s an example: On December 29 of last year, you could have locked a 30 year fixed rate mortgage at around 4.25% without paying any discount points. Today, the same loan will be 3.625%–that’s a 5/8% lower rate. That’s the lowest point in 12 months. To find a lower rate, you’d have to go back three years or more.

Is it worth refinancing now? Possibly. For a loan of $400,000, for example, with a rate of 4.125%, dropping your rate to 3.625% will cut your monthly payment by close to $150 a month. You’d save over $6,000 in the first five years–after recovering the cost of doing the refinance.

You should be aware that when rates have a prolonged rally as they have done this year, there is a very good chance that they’ll turn around and go back up with no warning. At a minimum, you should look at the numbers for your own situation to determine whether you can benefit.

If you’d like to start the process now, click on the “Get Started”  button below.

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Please note: none of the foregoing should be interpreted as a rate quote. The interest rate you can get will be determined by a detailed analysis of your financial profile.

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