Recent weeks have seen mortgage rates slip back from the high point reached in late August. For some, this might represent a second chance to refinance. For other homeowners who are just now seeing their home values emerge above their loan balances, this may be their first bite at the refinancing apple. In either case, a sense of urgency is needed or the opportunity may evaporate.
The immediate threat to low mortgage rates? The standoff over the debt ceiling, which has raised the specter of a default on US debt obligations. Any level of default by the entity long considered the world's most reliable borrower would be the ultimate economic wild card -- it would be so unprecedented that there is no telling what would happen. However, there are three reasons to suspect this could squash refinancing opportunities:
- Interest rates could soar in a credit panic. If the creditworthiness of the US government is called into question, it could radically reset the current structure of interest rates. As lenders generally become more skeptical about borrowers, they are likely to charge higher rates. Note that even if there is a late-hour resolution to the debt-ceiling standoff, the brinksmanship that has already occurred is likely to make major foreign creditors a little less eager to invest so heavily in US debt in the future. Weaker demand for buying debt translates into higher interest rates.
- Lenders may be hesitant to loan money in a credit squeeze. A default could cause a 2008-style chain reaction of missed obligations which makes credit very scarce. Only the most qualified borrowers are likely to get a loan under such circumstances.
- Home prices could tumble as the economy recoils. The budget and debt ceiling standoffs have already been unsettling for the economy, as businesses are loathe to expand under such doubtful circumstances. If the economy has a relapse, expect home prices to suffer. Home values that have just emerged from under water could find themselves sinking again.
Because these outcomes threaten to both raise mortgage rates and depress housing prices, they would be even harder on homeowners who want to refinance than on would-be first-time buyers. Therefore, if you have an opportunity to refinance before these consequences set in, you would be wise to act quickly.