It's been a great party, but it might be time for last call.
The past few years have been an extraordinary time to refinance, and millions have benefited from it. FHA refinance has been an especially sweet deal. However, nothing this good can last forever, and there are concrete economic reasons to believe that 2016 may see the end of the best refinancing opportunities.
An Extraordinary Time to Refinance
A quick look at interest rate history helps you appreciate how unusual the past few years have been – and unusually good for refinancing.
According to figures from the Federal Reserve, from their inception in 1971, 30-year fixed mortgage rates never dropped below 5 percent until 2009. Since then, they have been below 5 percent most of the time and often below 4 percent. Their level of 3.69 as of this writing is less than half their historical average of 8.33 percent.
In short, these are not subtle differences in rates. The drop in rates has been enough to represent a substantial savings for most homeowners who bought a home prior to this decade.
The reason FHA refinance has been especially attractive is that on top of participating in the low interest rate environment, FHA mortgages also lowered their mortgage insurance premiums last year. This lower premium represents an additional opportunity to save for FHA borrowers who refinance.
4 Reasons 2016 May Be the Last Call
So why shouldn't this great refinancing environment continue? Here are four reasons why 2016 might represent the last call for such great conditions:
- Unemployment has reached the 5 percent level. Despite a mixed economy, job growth has been pretty steady. What has this got to do with refinancing? Well, one of the things that allows for low mortgage rates is low inflation. However, when unemployment gets down below the 5 percent mark, it becomes difficult to find good workers. The resulting competition for labor can result in higher wages, and more inflation. You may have seen the campaign for a $15 minimum hourly wage gaining momentum in several parts of the country. If unemployment were not so low, there would be less support for this movement. That's just an example of the relationship between low unemployment and higher wages.
- Oil prices must eventually level off. A key factor in keeping in inflation so low has been the steep plunge in oil prices. However, this cannot continue indefinitely. In fact, oil prices leveled off in February, and rose in March. If that is the shape of things to come, expect to see more inflation – and ultimately higher mortgage rates.
- Some lenders may be courting trouble. It is the cycle of things: lenders tighten approval standards when defaults are common, and then they start to loosen up when borrowers have been more reliable for a while. That looseness ultimately leads to more defaults, and the cycle starts over again. We may be seeing some of that looseness in the market now. According to a survey by the New York Federal Reserve, the rejection rate for refinancing applications has fallen sharply over the past year, from 24.2 percent to 9.7 percent. While that makes this a great time to refinance now, looser standards could spell trouble in the future. Higher default rates would force lenders to raise mortgage rates to cover the added risk. FHA refinance mortgages could be especially affected if poor loan performance forces the insurance premium to be increased.
- You can only beat the odds for so long. The comparisons between historical mortgage rates and today's may underscore what a great refinancing environment this is, but they also serve as a reminder of how unusual current rates are. How long can rates remain at less than half their historical norm? Anyone who refinances at these rates is essentially beating the odds, and you cannot count on always being able to do that.
The idea of last call is to give people one final chance to belly up to the bar. If you haven't refinanced yet, you may want to heed that call.