Homeowners Once Again Swept Up in ‘Re-Fi’ Wave : Housing: Ever-dropping mortgage rates create big interest in refinancing. This time, more seek 15-year terms.

When mortgage rates dropped into the 8 1/2% range last year, Barbara Miller refinanced the 10 1/2% loan on her four-bedroom Palm Desert home and sliced a cool $400 off her monthly payments.

And when rates surprised many economists by plunging below 7 1/2% this spring, Miller refinanced again, cutting her payments another $200.

Miller, who books actors for Warner Bros. television shows, has not even made the first payment on her new loan. But she is already thinking of refinancing yet one more time now that rates have dropped below 7% for the first time in a quarter-century.

“The way I look at it, refinancing has already given me a $600-a-month pay raise over the last year and a half,” said Miller, who is considering a 6 1/2%, 15-year loan with no upfront fees. “I’ll keep doing it as long as rates keep dropping.”

Homeowners, brokers and lenders in Orange County and throughout Southern California all believed that the latest round of refinancing had peaked in June, when nearly 58,000 refinance loans worth $8.06 billion were completed in the six-county Southern California area. But lenders’ phones started ringing off the hook again last week, when rates on 30-year mortgages fell to 6.9%--their lowest point since 1968, when Lyndon Johnson was President and “Rowan & Martin’s Laugh-In” was the most popular show on television.

Still, the latest “re-fi wave” looks different from those that washed over the housing market in the summer of 1991 and in early 1992.

This time, homeowners in record numbers are abandoning higher-rate, 30-year loans for 15-year mortgages, trying to build equity faster in order to save tens of thousands of dollars in finance charges.

This trend may be healthy for family finances, but it is taking a toll on the economy. That is because the savings created by a new loan’s lower rate are offset by the higher monthly payments a 15-year term requires. In effect, these homeowners are taking advantage of lower rates to build equity rather than put extra cash in their pockets that can be spent on cars, clothes, dining out and in other ways that stimulate the economy.

“People like the idea of paying off their mortgage before they retire, or before their kids go off to college,” said Thomas T. Hammond of The Hammond Co., a mortgage banker headquartered in Newport Beach. “If you’re 30 years old now, the idea of owning your house ‘free-and-clear’ when you’re 45 sounds pretty good.”

At the same time, many California homeowners are growing increasingly frustrated because they cannot take advantage of the re-fi boom. They are stuck with their high interest rate loans because their equity has been eroded--even wiped out--by the long decline in home values.

“It’s a great time to refinance, but a lot of Californians can’t do it because prices have dropped,” said Donna Callejon of the Federal National Mortgage Assn., known as Fannie Mae, which buys loans from lenders and repackages them for sale to investors.

Today’s average 6.9% rate on 30-year loans is down from about 8% a year ago and 9% in the fall of 1991, when the first of the three big re-fi waves hit.

Rates on fixed, 15-year mortgages have plunged even lower--to 6.49%. As a result, more than a third of all borrowers today--35.2%--are rejecting the standard 30-year term and choosing a 15-year pay-back plan instead, according to Fannie Mae.

“We’re getting a lot of people who are ‘trading-in’ their 30-year mortgage for a 15-year schedule,” said Jerry Baker of Pasadena-based Countrywide Funding, where the latest refinancing boom has pushed loan volume up 67% from a year ago. “Their payments will be roughly the same, but cutting their loan term in half could save them more than $100,000 in future interest.”

Although 15-year schedules cut a mortgage by half the usual term, Baker said, monthly payments on these “quick-pay” loans are usually only 20% to 30% higher because the interest rates are lower and the principals are paid back much faster.

Still, most of the savings these homeowners enjoy by getting a lower rate are offset by the higher payments needed to pay the loan off in 15 years. So even after they have refinanced with a 15-year mortgage, homeowners do not have extra cash to spend at department stores, auto showrooms and the like.

Although the Mortgage Bankers Assn. of America estimates that lower rates are expected to save homeowners about $10 billion this year, most of the money is being plowed back into mortgage payments or used to pay off higher-rate credit cards.

“There’s this $10-billion pile of cash out there that could give the economy a big shot in the arm, but a lot of the money just isn’t being circulated yet,” said David Lereah, chief economist for the bankers’ trade group. “There’s always merit in saving money, but right now we’re mostly seeing its downside.”

Still, some analysts say, the trend toward shorter-term mortgages could help the economy in the long run.

With about two-thirds of all Americans still choosing 30-year loans, sooner or later those homeowners will begin spending their monthly savings and stimulate the economy, these analysts contend. Then, homeowners who are taking out 15-year loans today could prolong the spending boom by tapping their built-up equity and going on a new round of spending.

“At least it’s a good theory,” said John Tuccillo, chief economist for the National Assn. of Realtors. “Only time will tell if it proves correct.”

Most lenders say that unlike during previous refinancing booms, they have avoided the paperwork logjams that led to frustrating delays in the past. Most lenders say it takes between 30 and 45 days to complete a routine refinancing package, about the same time it took when business was slower.

That is a sharp improvement from the previous re-fi waves, when many borrowers complained that they had to wait more than three months for loan approval.

“Many lenders, including us, have streamlined the loan process and installed faster computers, and a lot of us hired new people when refinancing jumped before,” said mortgage banker Hammond. “We’re better equipped to handle the latest round of refinancing than we were in the past.”

The latest refinancing craze helped Hammond’s Newport Beach company make more than $100 million in loans in August, its best month ever.

Still, many homeowners who have tried to refinance recently have run into another obstacle, one that hurt consumers in 1991 and ‘92: They simply do not have enough equity in their homes to qualify for new loans at the lower rates.

Most lenders will not refinance a mortgage unless the owner has at least a 20% equity stake in the property, fearing that anything less might encourage the loan applicant to quit making payments if values fall farther.

“If you bought your house in the past few years with a small down payment, your property value has probably dropped by 10% or 15% and you don’t have enough equity to get a new loan,” said John Karevoll, an analyst who tracks lending and price trends for La Jolla-based Dataquick Information Services.

There is no need to tell that to John and Karen Williams, who bought their four-bedroom Antelope Valley home for about $170,000 just as prices peaked in 1990.

The Williamses tried to refinance their 10% loan just a few weeks ago, but their application was denied after an appraiser said the $149,500 they owe on the home is about $10,000 more than the house is now worth.

“My home has dropped $30,000 in value and I’m stuck with a 10% mortgage,” moans John Williams, a carpenter. “I’m stuck with the worst of both worlds.”

Times staff writer James S. Granelli contributed to this report.