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Refis Jump

Refis Jump

15-year fixed rate offers best option

June 14, 2002


Mortgage refinance applications have increased for the past three consecutive weeks and appear on course to continue their rise. Applications for refinances were up more than six percent from last week, according to the most recent weekly survey of mortgage bankers, commercial banks and thrifts by the Mortgage Bankers Association of America (MBA). Refinance applications represented 42.3% of total applications, their highest point during the past month.

Recently falling Treasury yields may prompt another refinance wave. According to a recent article in the Wall Street Journal, an economy that is weaker than initially believed is prompting forecasts that mortgage rates will stay low — and possibly even fall further.

The majority of banks, thrifts and credit unions surveyed by expect for rates to fall during the next five weeks, while more than a third expect no change.

“Benchmark Treasury yields continue to fall, dropping below 5 percent, and taking mortgage rates with them,” said’s Greg McBride. “Upcoming data on retail sales, producer prices, industrial production and consumer sentiment are expected to be favorable. However, even positive reports on all fronts may not counter investors’ pessimism.”

Overall applications were down almost six percent, dragged down by a 13 percent decline in purchase applications, MBA said.

The average adjustable rate mortgage (ARM) fell four BPS to 4.67%, according to Freddie Mac’s survey of 125 lenders. “There is a slight chance the Federal Reserve Board will raise rates when it meets later this month, but with the current labor market and slowing consumer spending, it is more likely that it will take no action until August at the earliest,” said Frank Nothaft, Freddie’s chief economist. “As a result, short term interest rates such as the one-year ARM drifted further downward this week.”

While ARM activity increased from 16.4% to 17.5%, currently low fixed rates reduce the incentive for borrowers to risk future rate increases for an initial rate that is 2.04% better than the 30-year fixed. The difference between the ARM and the 15-year fixed is only 1.5%.

The 30-year fixed rate was unchanged at 6.71%, and the 15-year edged down 0.01%, or one basis point (BPS) to 6.17%, according to Freddie. The fifteen year, which is 54 BPS lower than the 30-year, currently offers the most attractive option for borrowers.

For example, a $200,000 30-year loan currently has a rate of 6.71% and a principal and interest monthly payment of $1,285. Compare this to the 6.17% 15-year payment of $1,697 — a mere $412 more monthly to lop off 180 payments of $1,285. That’s right, by paying $412 more per month using a 15-year loan, a consumer can save about $231,300!

More importantly, fifteen years from now — when the 30-year borrower will effectively be starting a new 180 month loan — the 15 year borrower will be paid in full. Even if the 15-year borrower sells the property in five years, the balance on the loan will only be $152,502. Compare this to the 30-year borrower, whose balance will be nearly $190,000.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of,, and

email: [email protected]

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