Last Wednesday, the CBOE Volatility Index, a highly regarded measure of market volatility, reached its highest reading since November of 2011. Several times over the past week, investors sold off stocks en masse. Stocks would then veer higher the following day, only to dip back over some piece of unsettling news.
You might recall: late-2011 was a notably unstable time due to the “sovereign debt crisis” in Europe. Greece and Italy, for example, appeared ready to default on their debt obligations. Investors worried that sovereign default in the Eurozone would have harmful repercussions for the global economy.
Here we are in 2014, and global instability is again impacting U.S. stock markets:
- The European economy may be slipping back into recession. German industrial activity has dropped. The Greek stock market has plummeted.
- The geopolitical situation remains a mess, with unstable situations in Russia, Ukraine, and the Middle East (Syria, ISIS, etc).
- China’s economy appears to be slowing. What repercussions will this have for global demand?
With all of the uncertainty, is there cause for concern?
U.S. retail sales came dipped in September, but other data paints the picture of an economy that is in a steady cycle of growth. U.S. employment news continues to be positive: new jobless claims fell to their lowest level since 2000 last week. Construction activity increased in September.
Stock indexes hadn’t had a “correction” (defined as a dip of 10% or more) in three years, whereas corrections typically happen about once per year. Uncertainty might have given investors the nudge they needed to sell off into this “correction”. Put simply, the stock pullback was overdue. The volatility component comes in as investors attempt to buy at the bottom of the market and find undervalued purchases.
Volatility and uncertainty put downward pressure on mortgage rates.
Over the past three weeks, interest rate pricing has moved down by between 1 and 1.75 points. A “point” signifies one “percent” of the total loan amount. By dollar amount, an interest rate that costs 1 “point” on a loan of $400,000 would translate to $4,000.
Like anything you would purchase, mortgage rates have prices. The lower interest rates are “more expensive”, and buyers are charged more “points” to obtain them. To avoid the expense, buyers can accept a higher interest rate for a lower charge. The higher rates will often offer a “rebate” that the borrower can use to cover closing costs.
Is it better to accept short-term pain and pay “points” for a lower rate? Or accept a higher rate to help cover closing costs? If the owners intend on staying in the home for a long time, the lower interest rate could result in significant long-term savings.
Give us a call at 805.543.LOAN and we will break down the numbers and help you find the best solution for your unique situation.
The Savings Window
To give you an example of just how friendly such a significant price improvement can be to your wallet, consider the following scenario:
Joe Buyer is taking out a $400,000 home loan and elects to use the standard “Conventional” home loan with a 30-year fixed term. Joe Buyer wants to find the lowest possible rate to keep his monthly mortgage payments at a low, manageable level.
On September 24, the 4.000% 30-year fixed rate (4.162% APR) is expensive, and would have cost Joe Buyer 1.75% of the total loan amount: $7,000.
Nearly one month later (October 20), Joe Buyer can obtain the 4.000% 30-year fixed rate (4.015% APR) at a cost of zero points. The 1.75% price improvement offers a savings of $7,000!
The low rate environment offers an opportunity for buyers to increase their purchasing power and afford more home.
Existing owners also have an opportunity to refinance their mortgage into a lower rate. Any mortgage holder with mortgage insurance should also consider refinance to eliminate the costly MI payment.
Give us a call at 805.543.LOAN to discuss the possibilities! No commitment, no cost: just honest advice from the Mortgage Experts. 805.543.LOAN.