Last spring, as interest rates began slipping toward their eight-year low, a young Santa Ana homeowner thought the time might be right to refinance her $110,000 mortgage.
Like so many other homeowners attracted by the dropping mortgage rates, the woman, who asked not to be identified, knew she could reduce her monthly payments by substituting a new lower-rate mortgage.
But with only a hazy understanding of the dwindling advantages of refinancing and a lack of ready cash for the required up-front fees, the Santa Ana homeowner didn't get around to acting on her intentions. And now, reading about this spring's rising interest rates, she wonders if she has completely missed her chance to get out from under her existing loan.
"It's so confusing," she complained. "I get conflicting advice, and I'm not sure what I should do. I'm afraid to do it, and yet I'm afraid not to."
The confusion is understandable. Even the experts, the mortgage bankers and loan officers specializing in refinancings, don't agree on a common strategy.
At the heart of the issue is a lack of agreement on where interest rates are heading. In the past three months, rates have risen about 1 1/2 percentage points to about 10.5% on a 30-year fixed-rate mortgage. But whether they will continue to rise, stabilize or begin to dip is a matter of disagreement.
"Nobody really knows where they're going," said Mark Schuerman, executive vice president of Long Beach Savings & Loan's new mortgage banking division. "Some say they will begin dropping; others say they'll go up, and still others say they'll stay the same. There's no consensus."
Where the rates are heading is important in refinancing, the experts say, because most of these moves are driven by a homeowner's desire to capture a lower mortgage rate and reduce the monthly payment.
If the rates are commonly believed to be heading down, the best course is often to wait. However, if they are on the rise, a homeowner must either act immediately or be resigned to wait for a more advantageous time. And if rates are drifting, then the decision often boils down to a homeowner's individual situation.
In general, the advice from mortgage bankers is that refinancing is not worth the effort and the cost unless the new rate is at least two percentage points below the existing mortgage and the homeowner intends to stay in the home another seven years.
In the current market, that rule of thumb would advise homeowners with mortgages of 12.5% or more to refinance. And according to mortgage lenders, thousands of homeowners fall into that category.
Of course, the best market in recent years for refinancings has apparently passed for the time being.
In 1986, according to the Washington-based Mortgage Bankers Assn., about 2.5 million homeowners took advantage of the declining rates--which eventually bottomed out at about 8.5%--and refinanced their homes. The group's research economist, Richard Peach, said about 40% of the estimated $442 billion worth of new single-family mortgages issued last year were for refinancings, about twice the normal average.
The market was so attractive, Peach added, that an estimated 5% of all U.S. homeowners refinanced their mortgages in 1986. "We believe that's a record," he said.
Despite the recent uptick in rates, refinancing still can make sense under certain circumstances.
"I would do it if I had a mortgage of 14%," said Brian Chappelle, senior director of the residential finance division of the Mortgage Bankers Assn. "And there are a surprising number of people who still have those rates."
For whatever reasons, lenders report that they are still carrying high-rate mortgages on their books, despite efforts to persuade their customers to refinance.
Sidney Lenz, executive vice president of Countrywide Funding Corp., a Pasadena mortgage banking company, said that two months ago her company alerted about 2,500 customers that they could save a minimum of $25 per month on their mortgages with a refinanced loan. However, only about one-third accepted the company's suggestion that they refinance.
Lenz speculates that some homeowners might have been waiting for rates to drop even further, a decision that in retrospect appears a little greedy. Others, she guesses, might have been put off by the costs of refinancing.
Lenders say refinancing fees typically range from 1.5% to 2% of the mortgage amount in "loan fees," also known as points, plus closing costs that include charges for a title search, credit check, land survey and termite and pest inspections. The charges usually total about 3% to 5% of the loan.
Knowing that the fees can often act as a deterrent, lenders are increasingly offering to finance the charges along with the new mortgage so homeowners do not have to come up with the cash to pay for them. Such offers have proved popular.
In other cases, lenders are offering to waive the fees in exchange for the homeowner accepting an additional half a percentage point on the loan rate. Experts say these offers are rarely accepted but might prove attractive to highly leveraged homeowners who could not qualify if their mortgage amount were increased to cover the fees.
Although most homeowners select a fixed-rate mortgage when they refinance, there are advantages to adjustable-rate loans, which typically carry lower entry-year rates than their fixed-rate counterparts.
Schuerman of Long Beach Savings notes that a homeowner with an 11.5% loan, who wouldn't benefit from a new 10.5% fixed-rate loan, would save four percentage points by accepting a new variable-rate mortgage starting at 7.5%. Even with the initial fees, he notes, the homeowner would break even on the deal within one year.
Schuerman said this strategy is most appealing to homeowners who expect to sell their homes soon, since adjustable-rate mortgages are assumable. However, he recommends paying attention to amount the loan can be adjusted over its life, cautioning that benefits can quickly evaporate if the loan is allowed to rise more than 2% in any year or more than 5% over its life.
Still, the question remains if this is the time to refinance a home. The answer is that it is not as good as it was a year ago, or even two months ago, but it may be as good as it's going to be for some time.
The key, say several mortgage bankers, is not to focus on picking the absolute bottom of the rate market. "That's risky and depends on luck," said one broker. "Just evaluate your own circumstances and find a strategy that puts you in a better situation than what you currently have. That's how you come out ahead."