You've heard of the refi boom. Now get ready for the refi ripple.
Lenders nationwide are reporting a significant late-summer mortgage refinancing revival -- a 21 percent surge in applications in mid-August alone, according to the Mortgage Bankers Association. While most of the applicants appear to be simply taking advantage of the nearly half-percentage-point downward flutter in interest rates over the past several weeks, a sizable minority are "cashing out" -- converting their inflation-fed housing values into spendable dollars through larger first mortgages.
Roughly 2 out of 5 refinancers are in the cash-out category, according to the latest survey by mortgage investor Freddie Mac. But among certain lenders that specialize in refinancings -- notably online giant Ditech.com -- the proportion of cash-outs borders on 70 percent.
You might scratch your head and wonder: Hasn't every homeowner who could have refinanced already done it one, two, three times or more during the past 48 months? Will the last homeowner in America who hasn't already refinanced please turn out the lights?
Well, yes and no. Freddie Mac deputy chief economist Amy Crews Cutts said, "There are still significant numbers of people out there" for whom refinancing might make sense. Roughly 1 in 6 U.S. homeowners has a mortgage with a note rate between 7 and 9 percent, according to Crews. Another 33 percent have rates between 6 and 7 percent. One percent of all homeowners are still paying rates in excess of 9 percent.
With fixed-rate 30-year quotes of 5.5 percent to 5.75 percent with zero or minimal points at the largest lenders, refinancing is still an option for vast numbers of consumers. Ralph Hall, chief operating officer of GMAC Mortgage, said a substantial percentage of recent refi ripple applicants are people who bought newly constructed homes in the past year and signed up for fixed-rate loans in the mid-6 percent range, possibly through their builders' financing subsidiaries.
Refinancing is a no-brainer for these homeowners, Hall said. Not only does a new 5.5 percent mortgage save them money every month, but "they are likely to be able to spread out the costs of refinancing over the longer term because they plan to remain in their homes." Those costs typically include appraisals, new title insurance policies, and the usual grab bag of settlement and escrow fees.
Another key category of refi ripple applicants appears to be homeowners who have an immediate need for a large chunk of cash and view their home as their most consumer-friendly source. Though equity lines of credit are more popular than ever, many owners find the cost of money lower -- and interest charges more predictable -- in the fixed-rate 30-year market.
Say you need $40,000 to make a down payment on a vacation home or to invest in your business. By refinancing your existing mortgage and taking out an additional $40,000, fully secured by your equity in the house, you can obtain the money you need at nearly historically low costs in the 5.5 to 6 percent range, depending on your credit profile.
The easiest slam-dunks in the current refi environment, however, are zero-cost deals. These are widely available from lenders and through brokers and involve a relatively simple concept: Rather than paying for your origination and settlement charges at settlement, you finance them by including them in the interest rate on the new note. Of course, zero-cost refinancings are not literally zero cost. Like all loan transactions, they come with fees. You just don't pay them upfront. Instead you pay for them month by month in the form of a slightly higher interest rate than you would otherwise be charged.
Say you have a $250,000, 6.5 percent, 30-year fixed-rate mortgage. Your monthly principal and interest payment is $1,580.18. A lender or broker in today's market might be able to offer you a zero-cost refi at 6 percent with principal and interest payment of $1,498.88 -- saving you $81.30 per month, or nearly $1,000 a year. The 6 percent rate might be one-quarter of a percentage point higher than the 5.5 percent or 5.75 percent rate the lender could offer you in a traditional refi transaction, where you pay all origination and settlement fees upfront.
Ask yourself: Is there some good reason not to save a $1,000 a year? Why not refi if there's no out-of-pocket expense?
That seems to be what many ripple refinancers are figuring -- even if it's their fourth new mortgage since the late 1990s.
Kenneth R. Harney's e-mail address is firstname.lastname@example.org.