Mortgage Interest Rates Continue to Inch Downward

Last week’s surprise move by the Federal Reserve to cut a key interest rate by one-half point could give reluctant home buyers and those seeking home mortgage refinancing the psychological nudge they need to jump into the market, real estate experts say.

They caution, however, that the cut in Fed fund rates--the interest that banks charge each other for short-term loans-- will not lead to an immediate drop in mortgage interest rates, because current home loan rates already reflect a decrease that economists expected the Fed to make later this month.

The average rate for a 30-year fixed-rate mortgage with one point in Southern California was 7.03% last week, down from last year’s high of 8.6% in mid-May and down from 7.9% a year ago, according to Earl Peattie, president of Mortgage News Co.

“Predictions over the last four or five years that the economy would slow down have come true,” Peattie said. “If the [slowing] trend continues, the rates will go lower, and people who have not been able to take advantage of these rates will now.”

Tom Swanson, Southern California sales manager for Wells Fargo Home Mortgage, said that his regional office posted a $60-million increase in mortgage loans in December over the previous 12-month period. He added that the increase was unusual for the traditionally slow holiday period.

Nationally, total mortgage applications are up 36% over last year, according to the Mortgage Bankers Assn. of America. About 40% of those applications were for home mortgage refinancing, which posted a phenomenal 193% jump over last year’s pool of applicants.

“Even a small drop in [long-term] interest rates can make a difference between buying and not buying,” said mortgage bankers association economist Doug Duncan. “The rates change payments so dramatically.”

Real estate agents say that first-time buyers, especially, are benefiting from low interest rates and are testing the waters again, despite some reticence caused by the recent stock market volatility.

Mike Teer, a broker at Teer One Properties in Riverside, said that one of his agents just resumed house-hunting for herself after shelving the idea while interest rates were hovering in the 8% range.

“For some first-time buyers, the lower rates can make or break their day,” Teer said. “Even a car payment can make the difference as to whether they can make that monthly mortgage payment or not.”

To illustrate the dramatic difference in house payments when interest rates drop 1.5 percentage points, as they did in 2000, Doug Duncan calculated that at 8.6% in May, a borrower would have locked into monthly payments of $1,552 on a 30-year, fixed-rate loan of $200,000.

In mid-December, when the rates were 7.1%, that monthly payment on the loan would be $1,344, a 13.4% decrease. Over the course of a year, he said, the savings reach about $2,500, or a year’s worth of car payments.

Mortgage experts say that buyers with access to the Internet have become more savvy about interest-rate fluctuations and have educated themselves about the wide array of mortgage options available.

In the past, home buyers switched loans only once or twice over a lifetime, but today it’s not uncommon to refinance a home seven to 10 times, said Doug Perry, an executive at Countrywide Home Loans Inc.

Perry said that many consumers are seeking new loans to take advantage of the new conforming loan limit, which was recently raised to $275,000 from $252,700. The higher limit allows more borrowers to avoid jumbo loans and second mortgages, which require higher rates.

“The difference in buying power is significant,” Perry said.

As interest rates have dropped, so have the number of consumers seeking adjustable-rate mortgages, or ARMs, which peaked in Los Angeles and Orange counties in March.

In November, 21.6% of new mortgages in Los Angeles County were ARMs, compared with 37.8% in March, according to DataQuick Information Systems.

Southern California Realtors report that most of the home buyers applying for ARMs are those who know they will move in three to five years. The majority of them seek intermediate ARMs, which start with a fixed rate, then switch to an adjustable rate a few years later.

“Most people know that in three or seven years their interest rates might jump beyond their ability to pay,” said Bridget Bacon, an agent at Ramsey Schilling in Toluca Lake. “They’ve done their homework and know that teaser rates aren’t that great.”

Whatever the product, economists are recommending that homeowners who have been waiting for interest rates to drop take the plunge now.

“People like to wait until the rates hit rock bottom,” Wells Fargo’s Swanson said. “In the last 25 years, the rates have dropped below 7% only 11 months. My advice is to pick a rate you can handle and go for it; don’t play the market.”