Mortgage Rate Dip May Stir New Wave of Refinancings
Reversing a midsummer run-up, interest rates on long-term fixed-rate home loans are again tumbling sharply across the country and will soon be averaging below 10%, lending experts say.
The mortgage rate drop, which coincides with declines in other bellwether rates, clears the way for what some predict will be another round of home loan refinancings.
“This represents the second time around for those who missed the boat last spring on single-digit mortgage rates,” Robert K. Heady, publisher of the Bank Rate Monitor in North Palm Beach, Fla., said in a telephone interview.
According to the latest weekly survey from Bank Rate Monitor, 30-year fixed-rate mortgages have fallen to 10.24%, down from 10.40% in a week. Heady said he expects that the average rate, which is based on a survey of 50 large banks and thrifts, will fall into single digits within two weeks.
Depends on Economy
Mortgage rates have fallen lowest in California and the Washington, D.C., area, where fierce competition among lenders has driven down rates faster than in any other parts of the country, said John Tuccillo, economist for the National Council of Savings Institutions.
Bankers and economists said in interviews that they expect fixed-rate mortgages to settle in the mid-9% range later this year. What happens beyond that depends on the direction of oil prices and the U.S. economy, Tuccillo said.
Though the break in mortgage rates is good news for consumers, it is another reflection of the sluggishness of the nation’s economy. The Federal Reserve Board, in a move to pump some oxygen into the economy, pared the discount rate to 5.5% from 6% late last month, the fourth such cut this year.
The prime rate--the benchmark rate that banks use for business loans--has fallen in tandem with the discount rate. It now stands at 7 1/2%, its lowest level in nearly nine years.
“The rates are coming down for a reason, and the reason is the economy is moving sideways,” Bank of America housing economist Michael Salkin said.
Single-digit fixed-rate mortgages were unknown in this decade until this spring, when rates fell below 10% for the first time in nearly eight years. But an explosion in mortgage loan demand--fueled largely by homeowners seeking to refinance high-interest mortgages--sent rates back up to 11% and beyond in June and July.
So great was customer demand that many lenders drove up rates on purpose because they did not want any new business until they could process the flood of new applications.
Snowed Under by Loan Volume
American Savings & Loan, one of the state’s most aggressive marketers of fixed-rate mortgages, kept the base rate on 30-year fixed-rate home loans at 11.25% for six weeks this summer before allowing it to fall in late July.
“I think everyone in the United States decided to refinance their home or buy a new one” in March and April, said George Francis, executive vice president of Dallas-based Lomas & Nettleton, one of the country’s largest mortgage banking firms.
But many applications were eventually canceled because frustrated and angry customers saw rates rise as the time needed for loan processing dragged on for months. Appraisers, title companies and escrow firms were snowed under by the sudden surge in loan volume.
Many financial institutions are still experiencing indigestion from the refinancing frenzy.
“We still haven’t gotten rid of the old problems,” said Richard Rosenthal, a Venice real estate broker and president of the California Assn. of Realtors. “The pipeline is still clogged.” It now averages three months to process and close a mortgage loan, about double the normal time, Rosenthal said.
A few financial institutions are continuing to keep rates rates high until the logjam is broken. Home Federal Savings in San Diego, for example, has its fixed-rate mortgage loan at well above 11% because “we’re still trying to get through what we have in the pipeline,” a company spokesman said.
But most other large financial institutions in California are advertising fixed-rate home loans that are close to or below 10%.
Great American First Savings Bank in San Diego and American Savings & Loan in Stockton have dropped their lowest fixed rates to 9.875% and 9.75%, respectively, spokesman for the S&Ls; said. The rate at Bank of America has fallen to 10.125% and may fall as much as another half percentage point by the end of the year, economist Salkin said.
The difference between an 11% rate and a 9.875% rate on a $100,000 loan is a $952-a-month house payment vs. an $860 payment, according to ARCS Mortgage, a large mortgage banking firm in Canoga Park.
“Obviously, now is an ideal time to refinance existing home loans or to purchase a new residence,” said Ira Cohen, ARCS senior vice president. The firm cut its base rate on 30-year, fixed-rate mortgages to 9.875% on Thursday and to 9.75% on Friday.
Though the advertised loan rates are attractive, lenders admit that they do not emphasize the hefty fees for loan origination and closing costs. These base rates also normally apply to loans of less than $133,250 that will be sold into the secondary market to such agencies as the Federal Home Loan Mortgage Corp. (Larger loans are subject to higher rates.)
The mortgage rates don’t look as attractive when loan costs are figured in--a calculation that results in the “annual percentage rate.” A weekly survey in Saturday’s Los Angeles Times, for example, showed that only Columbia Savings among the state’s major financial institutions now has an annual percentage rate of below 10% on 30-year fixed-rate mortgage loans.