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Mortgage Hopes ... And Then 'Black Wednesday'

Plenty of people planned to refinance mortgages this summer. Then "Black Wednesday" happened.

That's what folks in the mortgage industry call May 27, the day that mortgage rates zoomed upward half a percentage point or more. Like a bouncing rubber ball, rates have gone up and down since then, in ever-smaller increments.

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Woodleywonderworks

Bottom line: Rates are substantially higher than they were a couple of weeks ago, when many would-be borrowers were floating instead of locking. They were gambling that mortgage rates would decline further or stay the same. They lost.

The benchmark 30-year fixed-rate mortgage rose 20 basis points to 5.65 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.44 discount and origination points. One year ago, the mortgage index was 6.26 percent; four weeks ago, it was 5.27 percent.

The benchmark 15-year fixed-rate mortgage rose 20 basis points to 5.06 percent. The benchmark 5/1 adjustable-rate mortgage rose 26 basis points to 5.2 percent.

Results of Bankrate.com's June 3, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Weekly National Mortgage Survey

30-Year Fixed
15-year fixed
5-Year ARM
This week's rate: 5.65% 5.06% 5.20%
Change from last week: +0.20 +0.20 +0.26
Monthly payment: $952.44 $1,309.97 $906.03
Change from last week: +$20.76 +$17.16 +$26.11
Source: Bankrate.com

Rates swung wildly for technical reasons that didn't have much to do with the overall economy. Give yourself a pat on the back if you understand the following explanation:

When mortgage rates rise, fewer homeowners refinance. This means that mortgage-backed securities will be paid off slower than investors expected. At the same time, yields on other bonds, including risk-free Treasury notes, are rising. Mortgage investors grow concerned. All things being equal, they would rather own higher-yield securities than lower-yield securities, just as you'd rather have a higher-paying job than a lower-paying one.

So investors sell their lower-yield mortgage-backed securities and buy higher-yield ones. And mortgage interest rates rise with the higher yields. When this cycle begins—the cycle of selling bonds to chase higher yields—it can feed on itself, creating powerful updrafts in rates. That's what happened on Black Wednesday.

Refinancing Dilemma

Now that rates are higher, should homeowners give up on refinancing?

"It's really a function of what is the rate they have on their mortgage, and how long they intend to stay in the home," says David Adamo, CEO of Luxury Mortgage, a Stamford, Conn.-based mortgage bank that lends nationwide. If someone still has a mortgage at more than 6 percent and plans to stay in the home for more than three years, "there's economic justification to refinance under today's rates," Adamo says. At the time he was speaking, rates were around 5.625 percent.

Christopher Cruise, senior loan officer for GOTeHomeLoans.com, says a rapid rise in mortgage rates can be a good thing if, as usual, rates fall back. Indecisive borrowers jump off the fence. "Anything below 5 percent, they're going to come flooding in," he says. "They say, 'Oops, I missed it this time. If rates come back down, I'm not going to miss it now.'"

You can't entirely blame fence-sitters for not locking when rates were so low during much of the spring. Because so many people were refinancing, it was taking the overwhelmed banks seven to 10 weeks to get loans from application to closing. Because a lot of lenders charged a fee for locking a rate longer than 30 days, borrowers often floated until they were comfortably inside the 30-days-till-closing window.