Low Rates Open New Refinancing Wave
The lowest mortgage rates since the November election are creating a phenomenon that lending industry experts thought they’d never see in 1993: A fresh new wave of home loan refinancings nationwide. You could be a candidate for riding that refi wave if your mortgage rate is in the upper 8% range or higher.
Fully 40% of new mortgage applications during the last several weeks have been refinancings--twice the level typical under normal market conditions--according to the Mortgage Bankers Assn. of America. Even in the midst of holiday season diversions, “a lot of home owners have noticed that rates have dropped (since early November) and they’ve decided not to miss the boat this time around,” said David Lereah, chief economist for the mortgage bankers.
Fifteen-year fixed-rate loans at 7 1/4% to 7 1/2% and seven-year fixed-rate “balloon” loans at 6 3/4% to 7% are pulling in much of the new refi action, say mortgage company executives. One-year adjustable-rate loans with rates between 4 1/2% and 5% are also hot attractions.
Despite heavy refinancing activity in 1992, the pool of American homeowners who could benefit by refinancing is vast--as long as rates stay low. Jesse Abrahams, principal economist for Freddie Mac, the Federal Home Loan Mortgage Corp., estimates that just one category of homeowners--those who took out loans between 1986 and 1990 at rates in the 9% to 11% range and have never refinanced--hold an astounding $800-billion worth of mortgages.
Lereah, of the mortgage bankers group, estimates the total universe of home mortgages that are potential candidates for refinancing at today’s rates to be as large as $2.4 trillion.
The overwhelming majority of those homeowners won’t refinance, say economists--either because they aren’t aware of the possible financial advantages or they don’t want to bother with applications, appraisals and new loan fees.
But for financially astute owners the return of low rates opens the door--at least temporarily--to a wide range of problem-solving measures via refinancing. Here’s a quick overview of the sort of refi strategies home owners are pursuing early in the new year:
--”De-leveraging,” cutting your total debt exposure. If you’ve got charge accounts and credit card balances eating you up at double-digit rates every month, you may be able to pay off all those debts via refinancing. Ditto if you took out a home equity line of credit some years ago and are still paying it down at an above-market rate.
Consider rolling up all or most of your monthly debt--including that 30-year mortgage of yours in the 9%-plus range--into a new 15-year fixed-rate loan below 8%. Not only might you cut your total monthly interest outlays substantially, but you’d also shorten the term of your home mortgage debt.
--Baby boomer college bills program. Major lenders say one of the biggest categories of refinancers in the current wave are baby-boom home owners with kids heading into college. Ivan Kaufman, president of Arbor National Mortgage Corp., active in eight East Coast states, says “baby boomers are our No. 1 customer.”
The boomers have typically owned their home for at least a decade, have built up considerable equity, but don’t have the liquid cash on hand to pay tuition bills of $15,000 and higher a year. Even if their mortgage is in the low 9% range, refinancing makes sense, says Kaufman: “They get the money they need (by converting their equity into cash), and they usually walk away with a much lower rate than they’d had on their original mortgage.”
--Equity builders who bought their first home in the mid-to-late 1980s. Generally younger than the baby boomer set, these owners have experienced slower equity growth than buyers in the prior decade. Rather than moving up to larger homes, according to Freddie Mac economist Abraham, “they’re more likely to stay put and build their equity by lowering debt and shortening the term of their loans.” Such owners are perfect candidates for refinancing, he observes, because “even a small monthly savings (on your payment) can make big sense when you’re staying in the same house for the long term.”
Arbor National’s Kaufman says first-time buyers from the 1980s are switching en masse from 30-year to 15-year mortgages. Even where the value of their homes has actually dropped, and owners have to bring additional cash to the refi table to close the deal, “they’re doing it,” according to Kaufman. “They’re telling us, ‘we want to build real equity (by cutting the length of our debt), and we’ll pay for the privilege of doing it if that’s what it takes.’ ”
--Adjustable-rate borrowers bailing out of uncertainty. Even if their mortgage rates have dropped into the 8% range, homeowners with adjustables are vulnerable to future rate jumps if the economy takes off under the Clinton administration. If you’re in that boat, refinancing into a fixed-rate 15- or 7-year loan can bring peace of mind--and lock in affordable monthly payments for years to come.
