With mortgage rates currently at an all-time low, millions of people around the country are purchasing and refinancing their homes. Many borrowers wonder why rates on refinances are slightly higher than rates on purchases, here are the top 5 reasons:
Processing and Underwriting Capacity problem.
All lenders have a limit about how many loans they can process in any given month. During a refinance boom, there is a shortage of employees who can close these loans in a timely manner. Most lenders are hesitant to hire too many new employees because these refinance booms are always temporary. In addition, purchases have closing dates they must meet, therefore all lenders prioritize them over refinances. One way they can reduce the number of refinances is to price their refinances a little higher.
Higher risk than purchases
When a lender locks a rate, they guarantee the borrower that their rate will be honored even if rates increase. Lenders lose money if they close a loan when the market is higher. Since purchases are always prioritized, refinances tend to take longer to close. The longer the lock, the higher the rate, the higher the risk.
Locking a rate for too long gives borrowers the ability to shop around and possibly go with a different lender. Locking a rate imposes a cost to any lender. If they don’t close this loan, they have to absorb this cost. It takes an average of 2 to 3 years to recuperate the cost of producing a loan. If borrowers refinance too often and too soon, lenders can’t even break even on their original investment.
The Federal Housing Finance Agency (FHFA) imposed a fee on refinances
In addition to all the reasons previously mentioned, The FHFA imposed an “Adverse Market Refinance Fee of .05% and lenders are responsible for this fee. Needless to say, this fee is passed to borrowers in the form of a higher rate. This fee was supposed to take effect on September 1st, it was later delayed until December 1st, 2020: However, the vast majority of lenders are already implementing it in advance.
COVID and 2020
We all know that 2020 has been a challenging year for most people in every possible way. Coronavirus has destabilized the mortgage market, with many people losing their jobs, the risk for all lenders has greatly increased. No lender wants foreclosures or even forbearances, they lose money every time this happens. One way to protect themselves from this risk is to increase their refinance rates.
Now the good news!!!
The Federal Reserve is spending $40 billion a month for agency-backed securities to help reduce the cost of purchases and refinances to stimulate the economy. With rates being at an all-time low, this combination has definitely helped our economy.
It is not too late to purchase or refinance a home, even with all the factors mentioned above, mortgage rates remain at historic lows.
Most Bankers and Brokers, like Rock Mortgage, have the ability to shop around for the best rates with many of the top investors in the country. They can also structure any loan in multiple ways to help you reach your goals. Not all loans are the same, please consult with your RMLO (Residential Mortgage Loan Originator) and ask about all of your loan options. They can explain rates and closing costs to help you design the best loan option for your particular situation.
Current Mortgage Rates VS. Refinance Rates | Rock Mortgage — Houston, Texas