Lower Rates, Coming Resets: An Opening For Refinancing

By Kenneth R. Harney
Saturday, January 19, 2008

Is it a refi renaissance? Or a fast-closing window of opportunity?

Nobody can say for certain, but there's no doubt about this: Thanks to the lowest mortgage interest rates in a year and a half, nearly 60 percent of all new mortgage applications by mid-January were for refinancings, according to data compiled by the Mortgage Bankers Association. Rates this week were 5.69 percent for a 30-year fixed-rate mortgage and 5.21 percent for a 15-year fixed-rate loan, Freddie Mac said.

Some home-loan companies reported much higher proportions of refinancings. At Associated Mortgage Group in Portland, Ore., 80 percent of new applications this month have been for refinancings. "This has been the busiest January I've had in 20 years," said David Jolivette, Associated's president.

While much of the demand is from homeowners facing payment resets on adjustable-rate and interest-only loans, many applicants simply want to take advantage of rates in the mid- and upper 5 percent range -- often with no out-of-pocket cash costs.

Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association, said "no-cost" refinancings -- in which transaction fees are rolled into the interest rate -- "are absolutely an option" for people who took out fixed-rate loans in 2006 or 2007 ,when rates were at or above 6.25 percent.

Though the specifics vary by lender, many brokers and mortgage companies can offer a zero-out-of-pocket deal for an extra quarter-point on the note rate. In other words, borrowers with a 6.5 percent fixed-rate loan might be able to refinance into a 6 percent loan without paying any fees at origination or settlement. The lender would simply add a quarter of a percentage point to a 5.75 percent 30-year conventional loan rate.

Assuming a $400,000 existing loan amount, homeowners could save $128 a month in principal and interest -- $1,536 over the course of a year -- by moving out of a 6.5 percent mortgage into a 30-year loan at 6 percent with no settlement costs.

Jeff Lipes, president of Family Choice Mortgage in Wethersfield, Conn., cautioned that some would-be refinancers cannot qualify in today's tougher underwriting environment.

For example, appraised values are a major hurdle for some homeowners. During the boom years, when property values were soaring, meeting the minimum equity tests for refinancing was rarely a problem -- even when owners wanted to pull out additional cash.

But in the past nine months, most national lenders have tightened underwriting rules and are now extra-cautious about appraisal accuracy, borrower equity and credit scores, especially in areas where prices have been soft or declining, Lipes said. As a result, owners who bought properties with minimal down payments a few years ago may find their appraised values lower and their equity positions insufficient to qualify for refinancing.

Absent appraisal issues, Lipes said, applicants with solid credit histories, documentable income and a lot of equity can readily refinance into fixed-rate mortgages at 5.63 percent to 5.75 percent, with no points and no cash out.

Another complication with refinancings compared with five years ago concerns jumbo mortgages -- those with principal amounts above $417,000. During the credit squeeze that reached its peak last August, jumbo rates zoomed far above their typical levels -- in some cases past 8 percent. Since then, jumbo rates have returned to the upper 6 to 7 percent range but are still too high for many potential refinancers.

What's fueling the sharp drop in mortgage rates, and how long might rates stay low? Could the Federal Reserve's widely expected half-percentage-point cut in short-term rates later this month flow through to the mortgage sector?

Brinkmann said the bellwether metric affecting mortgage rates is the 10-year Treasury bond, not short-term rates. In recent weeks, with the specter of recession on the horizon, there has been a "flight to quality" in the bond market toward ultra-safe Treasuries, he said. That demand, in turn, has helped push down long-term mortgage rates.

How long this continues will depend heavily on investors' perceptions of where the national economy is headed. Brinkmann's forecast calls for 10-year Treasurys "to start moving back up" at some point in the coming quarter.

Bottom line: Whether you're thinking about refinancing your current mortgage or taking advantage of January's exceptionally low rates to buy a house, don't sit around. Acting sooner rather than later should be a smart strategy.

Ken Harney's e-mail address is kenharney@earthlink.net.

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