An opportune time to borrow
Now may be the time to consider refinancing a mortgage or buying a home, as interest rates once again hover near last summer’s historic lows.
Judging from the recent surge in home loan applications, many homeowners and aspiring ones are seeking mortgages, although certainly not in the numbers at the height of the refinancing frenzy.
“The number of transactions between May 2002 and June 2003 were crazy,” said Dan Weiss, a mortgage broker at Golden State Lending Services. “The pace dropped, then it was at a normal level until a couple weeks ago. Now it’s jumped significantly again.”
Average rates on 30-year fixed-rate mortgages began to drift below 6% in October, according to Freddie Mac. They fell to 5.64% in mid-January, the lowest since mid-July’s 5.52% rate (the bottom was 5.23% last June). As a result, interest in refinancing, which had been significantly waning, picked up.
This dip below 6% has encouraged reluctant home buyers and procrastinators who haven’t refinanced to jump into the market, especially because rates are expected to climb to the 6% to 7% range by year’s end, lenders and economists say.
About 20% of mortgage holders have loans at 7% or higher, said Dale Westhoff, head of mortgage research at brokerage Bear Stearns & Co. in New York. Overall, about 45% of homeowners can benefit from refinancing, he added.
Beverly Fullerton recently took the plunge. After missing her chance last summer, the office receptionist locked in a rate of 5.5% two weeks ago, down from the 7.75%, 30-year fixed rate she had paid for three years for her Tujunga townhouse. She will save $277 a month in payments.
Like many borrowers who held off during the 2002-03 refi boom, Fullerton was waiting for rates to go low enough to offset the prepayment penalty attached to her loan. She is going ahead, even though she has to pay a $5,400 penalty, plus closing costs. It will take about two years before the refi savings start to kick in, longer than some brokers recommend, but Fullerton said the trade-off is worth it.
“I’m thinking of my retirement, which is coming fairly soon, and I wanted lower monthly payments for the long run,” she said. “Now I have peace of mind.”
Brokers are relying on a variety of strategies to help borrowers lower their monthly payments through refinancing.
Marc Shenkman, a Calabasas mortgage broker, recently helped a client conclude a refi deal that was timed to close the day after his pre-payment penalty period ended.
“The minute the penalty expires, people jump in,” he said.
That’s because of the “window of opportunity open right now for buying homes and refinancing,” said David Soleymani, managing director of First Capital Mortgage. “Even if they’ve done it three months ago, or a year ago.”
Adjustable-rate mortgages, which have lower initial rates than conventional loans, account for about 40% of today’s applications, said Bear Stearns’ Westhoff. His research indicates that more than a third of borrowers move within five years in a stable rate environment.
Freddie Mac’s latest weekly survey showed the rate for one-year adjustables averaged 3.61%.
Lenders say five-year hybrid loans, which have a fixed rate for that period then become adjustable, are now the most popular adjustable-rate loan.
A Santa Monica broker recently helped a client refinance a five-year hybrid loan of $1 million that had closed only three months earlier at a rate of 5%. The client was able to get the same type of loan at 4.5% for five years, with no points, and will break even on his closing costs and fees in nine months. The borrower will realize $21,000 in savings over the course of the remaining 51 months of the fixed-rate portion of the loan.
Despite the recent fluctuations, rates still are at historic lows, due in part to tame inflation and the slow pace of job growth, even as the economy grew the last half of 2003.
Most economists predict that mortgage rates will remain below or near 6% until midyear, when they are expected to begin an upward trend to between 6% and 7% by year’s end. Lenders say that is still a favorable rate.
“When people talk about fixed rates at 6% or 7%, it seems high, compared to what we’ve seen, but it’s really not,” said Doug Perry, senior vice president of Countrywide Home Loans.
“There is still a huge opportunity to get in there.”
