FALL HOME UPDATE : FINANCING : Mortgage Rates at Tempting Low

Those who’d like to buy a home and those who’d like to pay less for the one they already own face the same temptation: opportunities for home financing have almost never been better.

Mortgage interest rates running in the single digits--even as low as the 4% range--could represent the chance of a lifetime for many borrowers to buy or refinance.

The current mortgage market is “phenomenal,” said Angelo Mozilo, president of the Mortgage Bankers Assn. of America, an industry trade group. Mozilo is also president and CEO of Countrywide Funding Corp., based in Pasadena and with offices in Escondido.

“There’s never been a more fantastic opportunity, to buy or refinance a home,” he said. That opportunity is particularly ripe in California, Mozilo added, where not only interest rates, but also home prices, are dropping.


“It’s very unique for both rates and prices to be going down simultaneously,” he said.

Economic troubles here and across the state have made buyers hesitate, however. Area mortgage lenders say that upwards of 75% of their business is in refinances, rather than home-purchase loans. And requests for refinancing are rising.

Some borrowers have refinanced a number of times in recent years as interest rates have fallen, said Jim Jones, executive vice president and head of residential lending for Bank of America.

An Encinitas couple, the husband an accountant, is among them. With a second child on the way, they decided to tap the equity in the home they’ve owned since 1984 to pay for adding a second story.

They refinanced their original 13% mortgage to a 10.125% loan in 1986. They began tracking the market again last winter when rates dipped to the 8% range. After studying the market for about four months, they closed on a new mortgage for $155,000 at 8.875% in early July. Although the house payment stayed the same, the refinancing produced $30,000 in cash for the remodeling.

Shortly after, when rates dropped again, the couple went back to their lender, American Residential Mortgage Corp., to start the process again. With their third refinancing at 8.125%, fixed over 30 years, the monthly payment will drop by $86 to $1,150. At an up-front cost of $300 (for processing his application), the couple figures the move was worth the effort--they’ll make up that expense in a little over three months and be able to pocket the savings.

Those monthly savings are even greater for Marie and Mario Gajo, who refinanced their Mira Mesa home to an 8.5% rate on a 30-year, $188,000 loan in July. The couple figures they’ll save about $300 a month in the switch from their original, 11% interest-rate mortgage. Marie said they’ll use the savings to pay off accumulated credit card debt.

The rule of thumb when considering refinancing has been to figure that the effort will pay off in savings so long as the new mortgage-interest rate is at least 2 percentage points below the current mortgage interest rate, and that you’ll remain in the home for at least two more years. That’s about the time it has taken in the past to recoup the costs--for application processing, re-appraisal, title work, and loan-closing fees (generally expressed as a percentage of the loan amount)--associated with any mortgage.


With so many new mortgage products available today, however, experts say that rule of thumb may no longer apply.

“Every real estate owner should look at their own personal finances,” said Tom Heckendorn, senior vice president in the real estate loan division of Escondido-based North County Bank.

Richard C. Stevens, vice president of real estate lending at Fallbrook National Bank, says many of his customers are opting for so-called “30-due-in-5" loans when they apply for mortgage refinancing.

Rates on these mortgages are fixed--about 6.375% recently--for five years. In the sixth year, the loan may be paid in full or rolled over for the remaining 30 years of the mortgage at the prevailing rate plus 0.5%. Many 30-due-in-5 borrowers increase their principal payments while taking advantage of their lowered interest rates, Stevens said, so that their overall loan amount is reduced when the mortgage comes up for renewal.


Lenders also report healthy demand for 15-year loans among refinancing customers in their late 30s and their 40s, for example. Rather than lower monthly payments, many of these borrowers are seeking the security of knowing their homes will be paid off when they reach retirement age.

Others are reaping big monthly savings by refinancing with an adjustable rate loan where the lifetime cap--or maximum possible interest rate--portends payments no higher than they feel they can handle.

In answer to the question of whether now is a good time to look into refinancing, the answer from lending experts is a resounding yes.

But at least one adds a caveat:


“Expect closing times to stretch out to the 60- to 90-day time frame, much as they did last winter,” when rates briefly dipped below 8%, said Richard West, senior vice president in charge of mortgage banking for Union Bank.

Other lenders said they’ve adjusted staffing to respond to any surge in refinancing applications and can continue to process loans in 30 to 45 days.

Will rates rise again? Of course, the experts answer.

Increases are inevitable, if only because there’s not much left on the downside of the 4% or 5% rates offered on many adjustable, and even some fixed-rate, loans in recent weeks.


But how much, or when, they’ll rise is anybody’s guess.

Mozilo acknowledges the “conventional wisdom” that a win by Democratic Party presidential candidate Bill Clinton could spark a rise in interest rates. Others suggest that overall economic conditions will keep rates from rising significantly no matter who occupies the White House next year.

“I don’t see any things on the horizon that would cause interest rates to ratchet up in the next three to five years,” said West of Union Bank.

Given the relatively great deals they’re able to offer home-buyers, in fact, some mortgage lenders seem almost perplexed that there hasn’t been a stampede to their offices.


“The only explanation . . . is that in order to buy a home you have to have some degree of confidence in your future. You need not only low rates and low prices, but also a higher level of consumer confidence,” Mozilo said.

Even for those with uncertain financial prospects, however, Southern California lenders are tailoring mortgage programs to bring home ownership or home remodeling projects within reach. At least one lender has responded to consumers’ job-security jitters with a new mortgage payment insurance plan, and others in the area say they are studying the idea.

Glendale Federal Bank, which has offices throughout North County, last month introduced an insurance plan to cover mortgage payments to the bank in case the borrower is laid off or fired in the continuing recession.

Under the Mortgage Payment Security plan, borrowers can buy six to 12 months of mortgage payment insurance coverage monthly payments of up to $3,500. The premium on six months of coverage is 2.75% of the total monthly house payment, or $27.50 on $1,000; 12 months of coverage costs 3.75% of the payment, or $37.50 on $1,000 a month.


The fine print on the deals include a 90-day waiting period before the coverage kicks in. Workers who have already received lay-off notices are not eligible for the program.

Although all lenders stress that they are ready and willing to work with any borrower who’s ability to make mortgage payments is threatened, Glendale Federal officials say early response to the program has been promising.

“It’s a little early to tell the impact we’re going to have . . . but as far as making the phone ring, we’ve really created a lot of interest,” said Steve Schwertfeger, vice president of Glenfed Insurance Services, the bank subsidiary that administers the program.

Several other lenders have lowered down-payments, closing costs and qualifying guidelines to help first-time and low-income borrowers into mortgages.


For example, Bank of America makes both fixed and adjustable-rate loans of up to $202,300, with a 5% down-payment, available to borrowers whose gross household income, in San Diego County, is $49,500 or less. For borrowers who can put 10% down, the bank has raised its mortgage debt-to-income qualifying ratio on these “Neighborhood Advantage” loans to 40%.

In a similar vein, Union Bank, with offices throughout North County, offers an “economic opportunity mortgage” featuring a flat $99 closing cost fee to residents earning 80% of the median income for their census area.

Interest rates on these loans are typically about a quarter of a point lower than the lowest rate offered for a 30-year fixed mortgage, West said, and only a 5% down-payment is required, 2% of which may come from someone other than the borrower.

At American Residential, based in La Jolla, first-time home buyers can tap a a similar 5%-down program that requires only 3% to be their own cash. This lender has eased qualifying guidelines to allow borrowers to spend up to 33% of their household income on their mortgage debt and related payments, up from the conventional 28%.


“A lot of the market today is the first-time home buyer, and North County has its share of homes priced in that first-time buyer range . . . of up to about $200,000,” said Michael Graves, regional vice president and San Diego branch manager for American Residential. Graves points to Escondido, Vista and Oceanside as active markets for first-time mortgage borrowers.

In Oceanside, American Residential is also involved in a Mortgage Credit Certificate program that allows qualified borrowers to figure their federal income tax-related savings into their mortgage application, a move that could help some qualify for a larger loan.

For the move-up buyer shopping for a larger home, creative financing is a strong possibility.

“We have sellers offering every type of financing opportunity available, from incentives to low-rate second mortgages to sellers paying buyers’ closing costs,” said Bob Dyson, president of Dyson & Dyson Real Estate Associates, whose agents market properties throughout North County.


In one recent deal, for example, the buyer put only $50,000 down on an $800,000 home in the Rancho Santa Fe area. The buyer assumed an existing $500,000 mortgage loan on the home and the seller extended a second mortgage for $250,000 at zero interest for the first six months, 5% interest for the following two years, and 8% for the balance to 5 years, when the full principal would be due.

Trades have also become a fascinating part of the residential real estate market in the last year, Dyson said.

In one case Dyson cited, a La Jolla couple who needed more room swapped their condo for a $400,000, single-family La Costa home whose owners could no longer afford their higher monthly loan payments.

Both parties also wanted to tap the cash represented by the equity in their respective homes.


The owners of the La Costa home, valued at about $400,000, had about $200,000 in equity. The La Jolla condo was valued at $189,000, with about $114,000 of the value in equity--or what Dyson terms “frozen equity,” since neither seller had been able to access the cash through a sale.

Once they agreed on the trade, the deal proceeded to financing like any other home purchase.

After deducting selling costs, both parties realized enough cash to put 20% down on the trade property and still pocket a gain. The La Costans, by trading down to a smaller home, achieved their need for lower loan payments and walked away with about $130,000. The La Jollans, who could afford larger home payments, were able to apply the “unfrozen” equity in their condo toward a move up in the housing market.

“Often we get buyers and sellers and lenders in the same room and do a very open negotiation, with everybody looking eyeball to eyeball,” Dyson said. “Clients don’t want real estate done to them, they want to be a part of it.”



The first step to a successful trip to the mortgage window is a lesson in the lingo of lending. Here are a few of the terms you’ll need to know:

Down payment: The portion of a home purchase price paid at the time of loan closing.

Closing: Signing on the bottom line of a mortgage agreement. Also the time when associated closing or settlement costs are due. These include application fees, title searches and insurance, appraisal fees and loan origination fees, generally expressed in points.


Points: 1 point is equal to 1% of the loan amount.

Start rate: The initial interest rate charged for borrowing.

APR, or Annual Percentage Rate: Expresses the total cost of the loan as a yearly percentage rate.

Fixed-Rate Mortgage: Generally describes a long-term (15- or 30-year) loan with an unchanging rate of interest.


ARM, or Adjustable-Rate Mortgage: One where the rate of interest charged for borrowing is pegged to other short-term (six- to 12-month) investment vehicles described by an average or index.

Index: Determines the up or down movement of the ARM rate charged. The new rate equals the index rate plus the margin.

Margin: A constant spread between the index rate and the mortgage borrower’s adjusted rate.

Caps: Limits on adjustable-rate changes. One sets the maximum increase allowed for each period of adjustment; the second sets the maximum rate allowed during the lifetime of the loan.



The Mortgage Bankers Assn. of America offers 11 free consumer-oriented brochures, including a glossary and “A Consumer’s Guide to Refinancing Your Mortgage.” For copies, send a self-addressed, stamped, business-size envelope to the MBA, 1125 15th St. N.W., Washington, D.C. 20005. Another title: “How to Shop for a Mortgage.”

Lenders recommend asking friends and neighbors for referrals to mortgage bankers and brokers.

Other sources for referrals are the banks or thrifts that handle your checking or savings, as well as real estate agents.


The agent who sold you your home also can recommend possible sources for refinancing, said Steven Campbell of McMillin Realty in Rancho Bernardo.

Check the real estate section of your newspaper for lists of lenders offering competitive rates and terms.

Experts suggest asking about loan terms and fees available from a variety of types of lenders, including banks, savings institutions and mortgage brokers, who represent numerous lenders’ wares.

Compare not only the numbers, but also the level of service you receive.


“No question is a stupid question,” about a transaction that represents as much money as your mortgage, commented Marie Gajo, who checked with four lenders before refinancing her Mira Mesa home.

“If you aren’t comfortable about things, ask questions,” she recommended. If your questions aren’t answered to your satisfaction, keep shopping.

When it comes to comparing the bottom-line costs of various loans, “make sure you’re comparing apples to apples, because there are literally hundreds of deals out there today,” said Angelo Mozilo, president of the Mortgage Bankers Assn. and head of Countrywide Funding.

With adjustable-rate mortgages, for example, compare not only the start rates, but also the indexes and margins. How often can the rate be adjusted? What are the caps?


When trying to decide whether to pay a higher loan fee for a lower mortgage interest rate, consider how long it will take you to pay off the origination cost in interest savings. And recognize that those alluring “no-points, no-closing-costs” deals always come with higher interest rates.