Economic Update from Steve Papapietro of Opes Advisors, Palo Alto

Our view on rates this week is that the most widely followed indicators are sending different signals, but short term rates are likely to be steady with upward pressure on long-term rates. Increased  volatility is likely as the markets adjust to the new qualitative guidance from the Fed.  

Here is what we are watching:

Back to the Future

The U.S. added 192,000 jobs in March with the unemployment rate holding steady at 6.7%. Total private payrolls reached 116.1 million, finally surpassing pre-recession highs.  Employment numbers were also nudged higher for January and February.
 
In sum:  Moderate improvement in the labor market means that the Fed  will continue to gradually reduce stimulus while keeping interest rates low.
 
It’s the Weather
 
U.S. exports fell 1.1% in February to hit a five month low causing the trade deficit to widen. This shift surprised most economists who were expecting the deficit to narrow.  There were some hints that transport delays related to severe weather were to blame. Oils imports hit a 14-year low – good news for U.S. manufacturers now less dependent on more costly and volatile foreign supplies.
 
Manufacturing and non-manufacturing economic activity picked up in March, continuing an upward swing.  The Institute for Supply Management (ISM) reported growth in new orders, employment and production.  Both the overall economy and the manufacturing sector are growing and the rate of change is increasing.
 
In sum:  Economists are racing to reduce Q1 GDP estimates due to lower exports, yet the data show favorable demand and good business conditions. Combined, this is neutral to slight support for higher interest rates.
 
They Will Definitely Probably Think About It
 
The European Central Bank (ECB) kept rates steady at .25% and said it was ready to turn on its money-printing machine to avoid deflation. This is significant change and signals their thinking on the strength of economic activity in the Euro Zone.  The strong Euro is keeping prices down and too low inflation makes it harder to deal with debt burdens and slow economic growth.  The U.S. is tied to the European economy through interest rates, trade, and exchange rates.  Any shift can cause the Fed to change its stance.  Be skeptical; the ECB has perfected the art of saying one thing and doing nothing.
 
In sum: Expect no reaction from the Fed to the ECB announcement. If anything, continued weakness in Europe supports lower interest rates.
 
The Week Ahead
 
Wednesday, April 9th:   The Federal Open Market Committee (FOMC) releases detailed minutes from their last meeting.  The markets will look for signs the Fed is keeping rates low following confusion sparked by the Dot Plot  and Janet Yellen’s post-meeting remarks.
 
Thursday, April 10th:  Jobless Claims data. This has a big impact on financial markets because it measures emerging unemployment and gauges the strength of the job market. This provides insights into the direction of economic activity.
 
Friday, April 11th:  the Producer Price Index (PPI) This provides markets with insights into the direction of inflation.
 
Finally, Industrial production data are expected from a variety of big European countries. This will be an indication on the need for ECB to take action (see above).
 
In sum:   All provide insight on economic momentum and indicate the direction of interest rates. Increased jobless claims and a favorable PPI indicate a continued low rate environment. Labor market and price pressure and lack of clarity from the FOMC support higher rates.
 
While Opes Advisors, Inc. uses all reasonable efforts to ensure that the information contained on in this email is current, accurate and complete at the date of publication, no representations or warranties are made (express or implied) as to the reliability, accurate or completeness of such information. Opes Advisors, Inc., therefore, cannot be held liable for any loss arising directly or indirectly from the use of, or any action taken in reliance on, any information appearing in this email.
 
This economic update was brought to you by Steve Papapietro, Mortgage Advisor at Opes Advisors in Palo Alto. For any additional questions about this information or about your mortgage questions, please call him at 650.319.1642.

Is it Time to Refinance Your Mortgage?

Home ownership can be for many their biggest financial asset, and as a result, biggest financial concern. But with current mortgages dropping to their lowest point since the 1950s, many Silicon Valley homeowners are saving thousands a year just by refinancing. Is the time right for you? Let’s go through some considerations that cover the why, how, and hurdles of refinancing.

• Why refinance?
• Hurdles in refinancing
• Break-even calculation
• Comparing interest rates Shopping for a new mortgage

Why refinance?

The most common and obvious reason is that homeowners refinance to lower their mortgage rate. A lower rate means lower monthly payments and less money towards interest over the life of the loan.

For example, a 30-year fixed-rate loan of $400,000 at 6% would have a monthly payment of $2,398. But if you were to qualify for 5.5% on the same loan amount, your monthly payment would be $2,271, or a savings of $127 a month and $1,524 saved in a year.

Or you may want to adjust the term of a loan. Decreasing the time period of a loan results in a lower rate and paying off your loan sooner, for a slightly higher monthly cost compared to a 30-year loan. Increasing the length of a loan is a cash-flow option, freeing up cash now, but paying more over time.

You can also switch between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage. The riskier ARMs float with current interest rates, so your payments increase or decrease accordingly. Commonly, homebuyers are moving to a safer fixed-rate mortgage.

Cash-out is the last option, where you refinance a mortgage for more than you owe and receive equity in cash, which can help pay for large debts now.

Options outside of refinancing are home equity loans and lines of credit, and reverse mortgages.

Common hurdles when refinancing

Before you think a refinance is the easiest route to saving your financial back, strict requirements and sometimes extra costs don’t make the trip worth it.

Similar to the first time you applied for a mortgage, lenders are looking at three qualifications: income, credit score, and property value. If any one of these has suffered, lenders will likely charge additional fees or raise your rate.

Another issue can be if your current mortgage has a prepayment penalty, which reduces the benefit of refinancing, again, because of additional costs.

So talking to a loan officer is the first step to see where you fall financially and what you qualify for in terms of refinancing your mortgage.

Break-even calculation

How long it takes to recoup the cost of refinancing realized with a lower rate, the break-even point, is useful for determining if it is worth refinancing when considering how long you plan to stay in your home.

Typical fees that add to the cost of refinancing are loan origination fee, points paid to lower your interest rate, appraisal fee, inspection fee, closing fee, title search and title insurance, and other miscellaneous lender fees. Total fees can easily get into the thousands.

Lenders sometimes offer “no-cost” refinancing. Though you may not have to pay the above fees at closing, you will have to either accept a higher interest rate or the fees will be rolled into the term of the loan.

If you leave your home before recouping the closing costs there is little point in refinancing.

Let’s use our previous example, and say a refinance will save you $127 a month but closing costs were $4,500. To break-even, you would have to keep the loan for about three years; if you were to keep the house for 10 years you would save $10,720, including the cost of closing.

There are numerous refinancing calculators on the Web, like at bankrate.com, where you can plug in your own finances and get a quick estimate.

Comparing interest rates

As we saw with the initial graph, rates have been dropping over the years. But interest rates and fees change daily from lender to lender.

In addition to the most surefire ways -- good credit, income, and equity -- to an excellent rate you can also pay points. A point is equal to 1% of the total loan amount and the more points you pay the lower the rate.

To give you an idea of the current rates for a 30-year mortgage, here are some from a Bay Area lender as of July 2010:

No point, conforming loan (under $417,00) = 4.5% No point, “no-cost” conforming loan (under $417,00) = 4.75% High-balance loan (under $729,250) = .125% - .25% higher than a conforming Jumbo loan (anything higher than $729,250) = low-to-mid 5s

Shopping for a new mortgage

Shopping around and comparing loan offers by different lenders is the best way to save money. First, talk to your current lender, as they could save you time and wave fees since you are a returning customer.

Feel free to contact us if you are looking for recommendations on Bay Area lenders or mortgage brokers; also, if you would like to find out more about our real estate services. _

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