Your Mortgage : Lenders Keep Pace With Refinance Surge
Thousands of homeowners are rushing to refinance their mortgages now that fixed-rate loans are below 10%, but most lenders say that the latest wave of applications hasn’t slowed their processing time--a problem that plagued financial institutions and also frustrated borrowers when rates plunged five years ago.
“We’re processing loans just as fast now as we were when things were slower,” said Bob Garman of Directors Mortgage Loan Corp., where refinancing activity is nearly twice what it was a year ago.
Added Bob Sheets of Golden West Mortgage Co., a Canoga Park-based brokerage firm where refinancing now accounts for 70% of its business: “Things are busy, but we’re staying on top of it. Borrowers aren’t running into any paper work logjams.”
Many lenders say they haven’t seen so much “refi” activity since 1986, when interest rates dropped below 10% for the first time in that decade.
The Mortgage Bankers Assn. of America reports that about 32% of all mortgages being made today are used to refinance and existing loan. That’s up from 15% last year.
The nose dive in rates five years ago triggered an avalanche of refinance applications, burying lenders with paper work and forcing many borrowers to wait months before their loans could be closed.
Although you probably won’t run into any delays if you’re thinking about refinancing, you should do some planning before you turn in your loan application. It’ll help you pick the mortgage that’s best for you and minimize the headaches that getting a loan often involves.
First, give some thought to how long you plan to stay in your home.
“Unless your current loan has a really high interest rate, it probably wouldn’t make sense to spend a lot of money to refinance if you aren’t going to stay around long enough to recoup those expenses through lower monthly payments,” said David Seiders, chief economist for the National Assn. of Home Builders.
The length of time you plan to stay in your house can also affect the type of loan you choose, Seiders said.
For instance, you might want to opt for the security of a fixed-rate loan if you plan to stay put for more than three or four years.
Rates on 30-year fixed mortgages are now in the 9% to 9 1/2%-range, their lowest level in half a decade.
“You might also want to pick a fixed-rate loan if you’re going to retire soon,” Seiders said. “If you choose an ARM and rates move up, you might have trouble making your payments if you’re living on a fixed income.”
Although the low rates currently offered on fixed mortgage loans are tempting, lenders say you should not automatically reject the notion of refinancing with an adjustable-rate mortgage.
“If you’re only going to be in the house for a couple of years, an ARM might be your best bet,” said broker Sheets.
For example, Sheets said, introductory rates on “conforming” ARMs--loans for $191,250 or less--currently stand at about 6 1/4%.
Most of these loans have caps that prevent them from rising more than two percentage points when the rate is initially adjusted a year from now. So, even if interest rates skyrocket over the next 12 months, the highest your rate could go next year is 8 1/4%.
“Even if you have one year at 6 1/4% and a second year at 8 1/4%, the average rate you’d pay over the next two years would be 7 1/4%,” Sheets said.
“If you were definitely going to move in a couple of years, you’d save yourself quite a bit of money by choosing an ARM instead of a fixed-rate loan.”
Also consider the “two-step” loans that many lending institutions now offer.
A two-step loan is a hybrid of a fixed-rate mortgage and an ARM. It starts out with a below-market fixed-rate, currently about one full point below those offered on 30-year loans.
The rate automatically adjusts once, at the end of five years, and stays there for the life of the loan.
“You’d get a rate that’s lower than the one you’d pay if you took out a 30-year loan, and you wouldn’t have to pay any money to refinance if you decide to stay beyond five years,” Sheets said.
Most lenders also offer two-step loans that adjust after seven years instead of five. Rates on seven-year two-steps are a bit higher than rates under the five-year program, but are still about a half-point lower than rates on 30-year loans.
There are, of course, a variety of other mortgages you might consider. But no matter which type of loan you eventually choose, here are some other pointers that can help your refinancing go smoothly:
* Visit several lenders and mortgage brokers to find out what kind of loans they’re offering. Be frank about your financial situation and future plans so the loan representative can help you determine which type of loan is best for you.
* Start gathering all the paper work you’ll need to show the lender. This usually includes your past two tax returns, or at least two years’ worth of W-2 forms proving your income.
If you’re self-employed, you’ll probably also need a profit-and-loss statement showing how your business has fared so far this year.
* Order a credit report on yourself from TRW or one of the other companies you’ll find under the “credit reporting agencies” heading in the Yellow Pages. Take steps to resolve any discrepancies immediately.
If you simply wait until the lender performs its own credit-check, your refinancing could be delayed by weeks or even months if the report turns up unexpected problems that prove hard to correct.
* Remember that most lenders are flexible when it comes to setting the terms of a loan. They’ll offer a lower rate if you’re willing to pay more up-front “points,” or will give you a loan with minimal fees if you’ll accept a slightly higher rate over the life of the loan.
Generally, it’s best to select a loan with low up-front charges and a slightly higher rate--or not to refinance at all--if you don’t plan on staying in your home for more than two or three years.
However, it’s usually wise to pay relatively high up-front fees if the lender is offering a deep discount on your interest rate and you’re planning to live in your home for several more years.
The savings you’ll reap from your lower monthly payments in the future will easily offset the money you pay to set up the loan.
Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053. Questions cannot be answered individually.
Average Rates for Residential Mortgages Average rates for residential mortgages as of Sept. 6, 1991.
Survey Conventional Mortgages Area 15 Year 30 Year Composite National 8.91% 9.24% 9.09% California 9.05 9.36 9.21 Connecticut 8.90 9.23 9.10 Wash. D.C. 8.82 9.14 8.99 Florida 8.88 9.24 9.07 Mass. 8.87 9.20 9.05 New Jersey 8.88 9.20 9.05 N.Y. Metro 8.97 9.28 9.14 New York 9.06 9.37 9.23 N.Y. Co-ops 9.15 9.47 9.40 Pa. 8.70 9.08 8.90 Texas 8.86 9.19 9.03
Survey Adjustable Mortgages Area 1 Year Composite National 6.92% 7.22% California 7.03 7.08 Connecticut 6.96 7.23 Wash. D.C. 6.68 7.03 Florida 6.94 7.21 Mass. 6.76 7.32 New Jersey 6.87 7.37 N.Y. Metro 6.95 7.33 New York 7.01 7.31 N.Y. Co-ops 7.46 7.88 Pa. 6.75 6.99 Texas 6.84 7.08
SOURCE: HSH Associates, Butler, N.J.
