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Posted March 4, 2013
in Mortgage Strategy

Rate Lock Windows : The Hidden Tax Of Low Mortgage Rates

The Refinance Boom Tax : As mortgage rates drop, the number of days to close a refinance rises.

The Refinance Boom Tax : As mortgage rates drop, the number of days to close a refinance rises.

The Refi Boom has caused mortgage rates to rise.

With rates persisting near all-time, lifetime lows, it's no wonder that today's homeowners are refinancing in droves. Nationwide, the 30-year fixed rate mortgage broke 4 percent fourteen months ago. Lenders may be overwhelmed with new business.

The number of days required to close on a refinance is growing. It now takes 55 days, on average, to go from the point of mortgage application to the date of closing. This glacial pace of refinance is affecting U.S. mortgage rates.

Click here to see today's refinance rates.

What Is A Mortgage Refinance?

A mortgage refinance is a financial transaction in which an existing mortgage is repaid in full using funds of a new mortgage. The old refinance is "satisfied" and replaced with a new one.

There are three types of refinances. The first is the cash-out refinance, in which the size of the homeowner's new mortgage exceeds the existing mortgage by five percent or more. Cash-out refinances are most often used to fund home improvement projects; or to reduce credit card debt; or to payoff student loans.

The second type of refinance is a cash-in refinance.

In a cash-in refinance, the size of the homeowner's new mortgage is reduced by five percent or more as compared to the existing mortgage. Cash-in refinances are most common for homeowners wanting to meet specific loan-to-value (LTV) requirements in order to get the bank's "the best rates".

The third -- and most common -- type of refinance is the rate-and-term refinance. With a rate-and-term refinance, the homeowner's goal is to reduce his mortgage rate, or to change his loan's term (length), or do to both.

An example of a rate-and-term refinance is a homeowner refinancing from a 5.25 percent 30-year fixed rate mortgage to a 3.25 percent 30-year fixed rate mortgage, while leaving his new loan balance within five percent of his existing balance. Another example is a homeowner moving from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage.

Click here to see today's refinance rates.

"Days To Refinance" Nearly 2 Months

As mortgage rates have dropped nationwide, the average number of days required to close on a refinance is increasing.

In August 2011, lenders required 37 days on average to close a refinance. According to mortgage software provider Ellie Mae, today's lenders need 55 days, on average.

It's more than just low mortgage rates that are clogging lender pipelines, though. The number of purchase mortgage applications is at a multi-year high and a surge in "underwater mortgage programs" such as HARP, the FHA Streamline Refinance, and the VA IRRRL have increases loan application volume nationwide.  

For example, in early-2012, when the Home Affordable Refinance Program (HARP) was revamped and relaunched as HARP 2.0, it launched a wave of refi activity among homeowners who had been previously unable to refinance. 

Nearly one million households were served by HARP in 2012 -- one million refinances that would otherwise not have happened, if not for the program.

Rising home prices are contributing to higher loan volume, too. As home values rise and rents follow suit, many renters are finding it cheaper to buy-and-own a home than to continue paying rent each month. More homes went under contract in January 2013 than during any month since the tax-fueled frenzy of April 2010.

Lenders are ill-equipped for the volume.

Based on data from the Bureau of Labor Statistics, the mortgage industry pared its staff by half between 2006-2011, from 505,000 to 248,000. The cuts were the result of the recession; of economic projections; of consolidation within the industry; and, notably, of dwindling demand from U.S. consumers.

Today, mortgage lenders employ far fewer people as compared to several years ago, yet process far more loan applications.

Furthermore, today's mortgage applications require more compliance and monitoring, so the underwriting-and-approval process takes longer than it did last decade when lenders were flush with personnel.

Click here to see today's refinance rates.

The Refinance Boom "Tax" : 0.125 Percentage Points

As the numbers of days required to close on a refinance increases, consumer face higher costs. This is because mortgage rates are typically quoted in 15-day increments. As the number of 15-day increments increase, the quoted mortgage rate increases, too.

For example, when Freddie Mac publishes its weekly mortgage rate survey, it lists 30-day mortgage rates, which means that the mortgage rate listed is valid for a period of up to 30 days from the date of rate lock.

As we've seen, though, 30 days is not enough time to close on a mortgage.

Thankfully, there are 45-day and 60-day rate lock periods available. Unfortunately, however, mortgage rates for 45-day and 60-day rate locks are inflated. This is because more time exists between the loan's "lock date" and its "close date".

Here is how mortgage rates can change based on rate lock period :

  • 15-day rate lock : -0.125 percentage points from the 30-day rate lock
  • 30-day rate lock : The rate lock standard
  • 45-day rate lock : +0.125 percentage points from the 30-day rate lock
  • 60-day rate lock : +0.250 percentage points from the 30-day rate lock

With the average refinance now requiring 57 days, today's refinancing homeowners aren't getting the lowest available 30-day mortgage rate. They're getting an elevated 60-day mortgage rate instead.

The Refinance Boom has banks too busy to close on loans quickly.

Click here to see today's refinance rates.

Get A Mortgage Rate

The length of time it takes to close your loan directly affects your mortgage rate. The faster you close, the lower your rate.  And not all refinances require extra time to close.

For example, the FHA Streamline Refinance is a simple refinance program which waives the need for an appraisal, and skips most typical verifications. An FHA Streamline Refinance can close in 20 days or fewer. A conventional refinance can close in 20 days, too -- it's just a little more rare.

Think you can close in 30 days? See what mortgage rates look like. Get started now.

Click here to see today's refinance rates.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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