Report: Holders of larger mortgages save more when rates drop

Mortgage applications jump as rates fall

Mortgage rates are dropping.

On December 12, 2018, the Mortgage Bankers Association (MBA) reported that home loan applications increased, likely due to falling rates.

US Treasuries — which often move in the same direction as rates — had their biggest weekly decline since 2017.

The MBA added that both the number and size of mortgage applications increased. “Larger loans tend to react more readily for a given change in mortgage rates," proclaimed Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

In other words, the bigger mortgage you have, the more you can save with a refinance.

Additionally, home buyers looking at more expensive homes have more to gain when rates drop.

How much can you save with a .5 percent drop?

If your mortgage is very small, it would take a significant decrease in interest rates to cover the cost of refinancing. But those with larger loans can recoup their refinancing costs fairly quickly.

Below, you can see the difference a 4.5 percent versus 5 percent will make at different loan amounts:

• $100,000 loan amount, savings: $30/month
• $250,000 loan amount, savings: $75/month
• $500,000 loan amount, savings: $151/month
• $750,000 loan amount, savings: $226/month
• $1,000,000 loan amount, savings: $301/month

If your fixed costs are $1,000 and the other refinancing costs come to .5 percent of the loan amount, the breakeven periods would be approximately:

• $100,000 loan amount,costs $1,500, breakeven: 50 months
• $250,000 loan amount,costs $2,250, breakeven: 30 months
• $500,000 loan amount, costs $3,500, breakeven: 23 months
• $750,000 loan amount, costs $4,750, breakeven: 21 months
• $1,000,000 loan amount, costs $6,000, breakeven: 20 months

And that is why people with larger loans are more likely to refinance when mortgage rates drop a little.

When rate increases trigger more applications

It makes perfect sense that home loan applications would increase when mortgage rates drop. Because lower costs make buying a home cheaper and create refinancing opportunities as well.

So why, then, would an increase in interest rates trigger mortgage application activity? It’s FOMO — the fear of missing out — on the best mortgage rates available.

Many who watch mortgage rates want to time their refinance or purchase so perfectly that they catch the very bottom of a mortgage cycle.

Back in September 2018, CNBC reported that “Homeowners continued their rush to refinance, as mortgage rates jumped even higher last week.

The new highs seem to be sending a message that this is the last chance for most borrowers to benefit from a refinance.”

The only problem with trying to “time the market” is that you only understand that rates have reached bottom once they begin climbing again. So when rates that have been falling rise slightly, many who had been holding out in hopes of snagging the best possible rate come to their senses and get their loan locks in.

Want to save big? Be ready when mortgage rates drop

Mortgage rates have been trending higher in general for months. However, that doesn’t mean we don’t see blips. Sometimes mortgage rates drop sharply and for only a few hours before moving higher again.

To take advantage of this, you need to be ready to close on a home loan quickly. You need to compare lenders early on and apply for your home loan. In other words, get pre-approved for your loan. Then, once you see the mortgage rate you want, you can lock your loan, have the property appraised and close.

How to save the most when you purchase or refinance

Today’s lower rates may be creating refinance opportunities, especially if your current mortgage is not very old.

• If your loan amount is higher, you may benefit more from a refinance than other borrowers
• If your current loan is not very old, ask for a “short rate” or “reissue rate” for your title insurance
• Compare mortgage quotes among lenders. They can vary by as much as .5 percent, so a loan that makes no sense with an expensive lender could save you tons if obtained from a cheaper lender

It’s not always obvious when a refinance makes sense. But checking with a few competing mortgage lenders should tell you if savings are on the table.