Lock in Low Rates Now

If you’re paying more than 6% on your mortgage and can meet the criteria for refinancing, the time to lock in a new, lower, rate is today. Remember, unlike a loan modification, short fi, short sale, keys for cash, or foreclosure, a refinancing will keep your credit rating intact as you lower your mortgage payment.

To make a refinancing worthwhile, between points and fees, borrowers need at least a 1 percentage point improvement between their current and new interest rate. Last week, according the Mortgage Bankers Association, the average rate on a 30-year fixed home loan eased to 5.01% from 5.02% the week before. Back in March, the rate hit its lowest in recent history, 4.61%

Rates are held down due to the Federal Reserve Bank propping up the market since last March with the purchase of $1.25 trillion of US mortgage back securities, MBS. To put this number in perspective, that’s more than $4,000 for every American.  Last March, the Fed announced that the program would end this year on March 31st. After the contentious reconfirmation last Thursday of Ben S. Bernanke as Fed Chairman, expect no policy change. In fact last week, the Fed announced its intention to stay the course despite the still underlying weakness in the housing market.

Another factor that could raise interest rates is China’s influence. As the world’s biggest exporter, China has the planet’s largest foreign currency reserves. The George W. Bush administration made a concerted effort to convince China to buy more US mortgage backed securities. In the wake of the Dubai real estate crash, and the Greek government’s soaring deficit and difficulty borrowing, China is reconsidering its purchase of US MBS. Internally, the bank of China has just raised its mortgage rates. Government regulators there have established lending quotas and are demanding daily reports on loan volumes in an effort to keep inflation there in check. China’s Gross Domestic Product, GDP, last quarter soared at nearly double the US annualized rate, 10.7% compared to 5.7% here .

The mortgage market shows that many borrowers are well aware of the pending rate raise. The number of home loan applications rose 21% last week, with refinancing increasing more than twice the rate of mortgages for new purchases, which climbed as well. In fact, after a drop in November, the National Association of Realtors reported that pending home sales edged up 1% in December compared to the month before.

Don’t let this opportunity pass. It’s easy to determine how much interest you’re paying on a fixed rate home loan, but if you’ve been coasting by with an adjustable rate mortgage ARM, remember that you are due for a reset which will work against you as the cost of funds goes up. Funding for US home loans is now international. Last week a friend discussed her LIBOR ARM with me, without realizing that the acronym stands for London Inter-Bank Offer Rate. Mortgage rates in the US will go up. A big factor here is the US deficit which has to compete in the world credit markets with mortgages for funding. Now our 2010 government shortfall is at a record $1.6 trillion dollars, 10.6% of GDP, the most since World War II.

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