You might want to take another look at refinancing your home before interest rates go higher. Bailouts and fees may put an end to the record-low interest rates we’re seeing today. The warning signs are flashing.
One closely watched metric is the spread, or difference, between what banks are charging for mortgages and what investors receive on mortgage-backed securities or bonds. Usually it’s a difference of about 0.5%. The spread has widened to 1% or about double its 30-year average. This means homebuyers are being charged higher interest rates while bond investors receive lower rates. Not a great formula for homebuyers or investors.
Borrowers are being assaulted by a multitude of headwinds. For starters, banks are charging more on mortgages in order to pay for the $25-billion Obama foreclosure bailout. Then there’s the new fee installed on Fannie and Freddie loans to pay for the two-month payroll tax cut extension passed last year. And thanks to the original bailout of the nation’s big banks, there are fewer of them today, meaning less competition. With less competition, it’s the customer that gets leveled by the mighty few.
You still have to jump through hoops for the banks—but maybe not as high as a couple years ago. If you qualify and have the means, reduce your term to 15 years. But do not go to a 15-year if you’ve got only 7 years left on your mortgage. In that case, double your payments and pay it off in half the time. If you have a 30-year and can’t qualify for a refinancing, every dollar you pay in addition to your monthly payment will go to reducing the term. So even if you can’t get a lower rate, you’ll save thousands in interest payments by reducing the term.
If you have a mortgage for the next 15 or 30 years (hopefully less), at some point the digital money creation by the Fed will likely lead to inflation. Based on the history of fiat currency, you’ll be paying your mortgage down with cheaper dollars. That makes borrowing appealing, but at the end of the day I’d prefer you own your home outright and get out of the mortgage business altogether.