With interest rates falling, people with high-interest W mortgages or balloon notes are turning their thoughts to refinancing at favorable rates. And lenders say they soon may be flooded with refinancing requests.
"The rush hasn't started yet," said William Sinclair, president of Perpetual-American Savings and Loan Association, the largest in the area. But, he predicted, there probably will be a "real onslaught" in one to three months as rates continue to fall.
" 'Refinance' will be the buzzword," Sinclair said.
Conventional mortgage rates for 30-year, fixed-rate loans ranged to as high as 19 percent a year ago, and the government-insured FHA and VA mortgage rate was at 17 1/2 percent in early October 1981.
Now conventional rates are around 14 to 15 percent, and the FHA/VA rate was dropped to 12 1/2 percent this week, the fourth such decline in nine weeks.
Local lenders say they are alreadygetting many calls from homeowners interested in taking advantage of the decline, though a large number of these also are indicating they will wait longer before actually refinancing, in hopes that rates will fall even lower.
Those considering refinancing a high-interest fixed-rate loan must weigh the front-end costs of the transaction -- which may be thousands of dollars -- against how much lower their new monthly payments at the lower rate would be.
Most lenders say the new interest rate on a 30-year mortgage would have to be perhaps 2 to 3 percentage points lower than the current rate to make refinancing economical. And even that assumes that the homeowner plans to stay in the house for at least several years.
"It's a tad premature to go through the motions right now" if the object is just to lower the interest rate, said James Christian, chief economist at the U.S. League of Savings Associations. A person with a 16 1/2 percent mortgage would need to get a 13 1/2 percent rate to break even on the upfront refinancing costs in two years, Christian estimated.
The situation is different for people with balloon notes, either through lenders or from the seller financing that became so common over the last couple of years. If these are coming due in the next few years, the owner will have to pay the upfront costs to refinance eventually anyway, and the question is whether rates in the next few weeks and months will be the lowest they will get at any time in the near future.
Most economists are predicting that interest rates will continue to fall some, but just how far and how long is a matter of debate. Some believe the rates will begin to rise again in the fourth quarter of this year.
"We are encouraging people to refinance balloons at the 12 1/2 percent FHA rate," said Mortgage Bankers Association President James F. Aylward.
Aylward said there are no hard figures, but housing industry experts say that "billions and billions" of dollars in balloon mortgages are going to have to be refinanced in the next few years.
As more of these come due, the supply of money available for refinancing could fall short of demand, keeping rates higher than they would otherwise be in future years, many industry economists predict.
For those who are waiting for rates to fall further, Aylward and others point out that loans generally take 30 days to process anyway, and the consumer can negotiate to have the lower rate used if rates decline between the time the application is made and the closing date.
A consumer going in to refinance a loan is likely to find a lender willing to accommodate him, according to members of the industry.
Perpetual-American's Sinclair pointed out that many of the high-interest loans people will want to refinance already have been sold by the original lender in the secondary markets. The lender then is only a servicing agent, and keeping the interest rate on the loan high would not benefit the lender. Refinancing fees, on the other hand, would.
Even lenders that have kept high-interest loans in their portfolios generally will be willing to refinance, simply because they know the consumer can easily go to their competitor next door for a new mortgage at the lower rate and pay off the first lender. If the lender wants to keep a customer, it will refinance, industry members say.
To figure out if refinancing is worthwhile, consumers have to consider a variety of variables. First, they must be prepared for the high initial cost. For a loan of $100,000, for example, a sampling of Washington-area lenders found rough estimates of between $2,250 and $5,000 in total upfront refinancing costs. Since charges may vary widely, a consumer would have to call around to find where he could get the best bargain on the various charges involved.
Here is a rundown on some of the charges to expect, according to area lenders and legal experts:
The largest usually will be the lender's points or commitment fee, generally 1 to 3 1/2 percent of the loan amount.
In some cases, a lender may be able to charge a prepayment penalty. Even when they can, however, many only do so if the loan is refinanced with another lender.
In the District, a lender may charge a prepayment penalty in the first three years of the loan but after that is prohibited from doing so. In Maryland, no prepayment penalty is allowed on any mortgage carrying an interest rate of more than 8 percent. In Virginia, there is a 2 percent ceiling on prepayment penalties on owner-occupied homes.
Prepayment penalties are prohibited on FHA or VA mortgages or loans owned by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac).The mortgage agreement itself may also prohibit any penalty. When one does apply, the mortgage agreement should specify what the penalty would be.
A new title search is estimated at between $75 and $150.
Preparation of papers and other legal work, $150 to $250.
Reappraisal of the property, $80 to $125.
Credit report, $25 to $40.
Title insurance, $2.50 per $1,000 or $250 on a $100,000 loan.
Upfront mortgage insurance, one-half to 1 percent of loan amount.
Local recording fees. No recording fee is required in the District when a loan is refinanced. In Virginia, under a new state law, none is required if the mortgage is refinanced with the same lender for the amount of the outstanding balance only. If it is with another lender, or for any amount above the old balance, Arlington and Fairfax counties charge $2 per $1,000 borrowed or $200 on a $100,000 loan. In Montgomery and Prince George's counties, the fee is $4.40 per $1,000 of loan amount plus one-half point. Any amount above the old loan balance is subject to another $10 per $1,000 fee in Prince George's.
Once these fees are determined, the consumer has to figure out how quickly he will retrieve that amount in the lower monthly payments and whether he plans to be in the house long enough to make it worthwhile.
Reducing the interest rate from 16 percent to 14 percent on a $100,000 loan would lower payments by $160 a month, from $1,345 to $1,185. At a 12 1/2 percent rate, the payment would be $1,068, or $277 a month lower.
The homeowner also must crank another calculation into the equation: the value of tax deductions on mortgage interest. Most of a homeowner's early payments are interest, so almost all of the amount he is saving by refinancing would have been deductible.
For example, someone in a 40 percent tax bracket who lowered his monthly payment by $200 might end up paying $80 a month more in federal taxes by losing part of the interest tax deduction.
If the homeowner plans on staying in the house a long time, refinancing becomes more economical; if they plan to move soon, or before their balloon note becomes due, it generally would not be worthwhile.
With all these calculations and costs associated with refinancing, Christian of the savings league can't resist reiterating a point the savings and loan industry has been trying to make for a year as part of its campaign for acceptance of adjustable-rate mortgages.
"That's one of the great things about the ARMs," he said, pointing out that rates on these loans can be adjusted down automatically if the index they are based on declines over a particular period.
"A year ago, everyone said ARMs would make people lose their homes. If they had one now, they'd be golden."