How will Britain's exit from the EU affect U.S. mortgage rates?
Financial market turmoil can be good for mortgage rates. Don't forget this concept as you continue to read headlines about how a "Brexit" is wreaking havoc on markets.
Brexit is slang for Britain's vote Thursday, June 23 to exit the European Union (EU), which is a political and economic union allowing free trade and movement of people among 28 member countries.
This outcome was unexpected, and caused stock markets around the world to nosedive.
Mortgage rates approach record lows
The Brexit vote also caused U.S. mortgage rates to nosedive. Rates were down .125 percent the day after the Brexit vote, and are now approaching all-time record lows as 30-year fixed rates move below 3.5 percent.
Why? Because Brexit uncertainty is causing investors to sell riskier global stocks and buy safer U.S. mortgage bonds - which are among the safest bonds in the world because they're comprised of U.S. home loans approved using the strictest guidelines in decades.
When bond prices rise on this buying, bond yields (or rates) drop. When rates drop, it's often a good time to refinance your mortgage.
To put it in perspective: On a $300,000 loan, if you refinanced at a rate dip of .25 percent, your payment could be lowered by $42 per month.
Mortgage rate outlook from here
When markets are driven more by politics than economics, rate movement will be especially unpredictable. If this Brexit-driven rate dip meets your financial objectives, you should work with your lender to refinance at this lower rate.
Some projections call for rates to rise gradually as Brexit concerns wane, but, conversely, there is also a growing consensus that ultra-low rates may be here to stay.
If you have the stomach to watch rate markets a bit longer, Brexit isn't the only factor driving lower rates. Forthcoming Brexit negotiations may inspire other EU countries to seek independence, which would fuel market turmoil and keep U.S. rates low.
This sentiment has already caused the Federal Reserve to pause its rate hike campaign, citing non-U.S. factors as contributing to increased risk of U.S. recession.
These conflicting predictions mean rate movement will be especially unpredictable in the coming months, so it's best to lock rate dips that meet your financial objectives. Your lender can help you with your objectives and mortgage math.
Tips for refinancers
Thinking of refinancing to take advantage of the low rates? Here are a few tips.
- Ensure your lender is quoting correctly. Rate quotes are predicated on a loan closing in a certain number of days. Longer rate locks have higher rates, and lock extensions can eat away refinance savings. If you see one rate quote lower than another when you shop, ask that lender what their rate lock period is, and make sure they can close your loan within their rate lock period.
- Ask about timing. Lenders get extremely busy during rate dips, so ask your lender to confirm that they're quoting a rate that allows them enough time to close your loan. (If they can't, you can look into finding a new lender.)
- Don't forget your second mortgage. Your second mortgage holder must agree to the terms of your new first mortgage refinance before the refinance can close. This is required even if you have a Home Equity Line of Credit (HELOC) with a zero balance. This step will add time to the process, so make sure lenders you're shopping with know this as they're quoting rates.
- Get ready to provide documents again. Even if you refinance with a lender you've worked with before, federal laws require them to update your employment, income, asset, and debt documentation for a new loan.
When do refi costs break even? A typical refinance costs $2,000 to $4,000, depending on your market. Interest cost savings from the refi should repay closing costs within 24 to 36 months. A refinance calculator can help you estimate your breakeven time.
And don't forget that a "no-cost" refinance isn't actually without cost. You're just accepting a higher rate to enable your lender to credit closing costs. Make sure your lender compares long-term savings of cost vs. no-cost refi options.
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Reminder for home buyers
A rate lock runs with a borrower and a property, so as a home buyer, you cannot lock a mortgage rate until you're in contract to buy a home.
Rate dips like the current one tipped off by the Brexit vote benefit you as a home shopper because you'll likely get to lock a lower rate when you get into contract. But until then, you're subject to daily rate market movements.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.