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September 13, 1991
Mortgage rates have fallen to fouryear lows this morning as the Federal Reserve dropped its Discount Rate to 5.00% (from 5.50%).
The widelyanticipated move came minutes after the release of the second favorable inflation report this week. The Consumer Price Index rose only .2% in August, joining the .2% gain in yesterday's Producer Price report.
Other data describe an economy which is barely treading water. August Retail Sales fell .7%, unraveling the reasonable gain in July. Instead of borrowing, consumers paid off 1.4% of the money they owed on credit in July the seventh payoff in eight months. And the money supply is still not growing enough to support a recovery.
This new decline in interest rates will help homebuyers everywhere, but will be a particular spur to refinances.
The calls are already coming in: "What's the interest rate today?" There are times when bankers wish they could answer: "It is the same as always. Nine is still nine, and eight is still eight."
The other call begins: "I heard rates are down to eightandahalf. Where are yours?" There is an extreme temptation to respond "Oh, no; we're all the way down to fiveandaquarter" (and wait a minute or two to tell them it will only cost twentyseven discount points).
The primary borrower confusion: the economics of paying fees (points plus origination) to get a low interest rate. The confusion is compounded by nitwit reporters quoting national rate surveys.
Dozens of organizations publish national and regional rate surveys, and each one has a different fee assumption. Some include two "points", some one, some none; and some use an APR calculation that muddles closing costs together with rates, points, and origination.
Help your clients out with a few key ideas.
First: discount points and origination fee are the same thing. Think total points.
Second: Day in, day out, it will cost .625% of the loan amount in "point" to reduce the interest rate by .125%. The converse is true: a borrower can save .625% in fee by raising the interest rate by .125%. (There are exceptions: some days it can be .50% or .75% fee per .125% change in rate.)
Third: No matter how you rig the math, it will take between five and eight years to recapture fees paid to get a lower interest rate.
Unless you intend to stay in your home forever, paying fees is a very bad deal.
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