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Can Use Falling rates give cause to refinance
Sweet deals on mortgages possible again for those looking to cut borrowing costs
By Ruth Simon
The Wall Street Journal
Originally published
January 26, 2004
NEW YORK -- If you thought you missed out on low
mortgage rates, think again.
Economic jitters have pushed mortgage rates
back down to levels not seen since July. That's good news both for procrastinators
who missed out on last year's refinancing boom and for home buyers looking to
keep costs down.
Rates on 30-year fixed rate mortgages currently average
5.82 percent, according to HSH Associates, financial publishers in Pompton Plains,
N.J. As recently as early December, mortgage rates were at 6.18 percent.
With so many borrowers having already refinanced, the lower rates aren't
likely to produce the kind of mortgage frenzy seen last summer. Still, at current
rates, roughly 45 percent of borrowers can profitably refinance, said Dale Westhoff,
head of mortgage research at Bear Stearns.
The drop in rates also should
provide a boost to the economy. Already, lenders are reporting a rebound in mortgage
refinancings, which should put millions of dollars into consumers' pockets.
And the lower rates could spur home sales, which have begun to cool in recent
months after hitting record levels.
The decline in mortgage rates comes
on the heels of a recent employment report that suggested that just 1,000 new
jobs were added to payrolls in December, despite robust growth by the economy
in the second half of 2003.
The weak job numbers helped push down rates
on 10-year Treasurys, as bond investors bet that the Federal Reserve will continue
to keep interest rates low to stimulate the economy. Rates on 30-year mortgages,
which tend to move in line with rates on 10-year Treasurys, also fell.
Window of opportunity
Susan Piccolo, had planned to
refinance last summer, but missed the boat because she kept waiting for rates
to drop even lower.
"I got a little greedy," said Piccolo, a registered
nurse who lives in Avon, Conn. When her mortgage banker called this month, Piccolo
quickly locked in a 30-year jumbo mortgage with a 5.75 percent rate, well below
her current rate of 6.375 percent. Piccolo said the new loan will cut her monthly
payments by about $160.
But the opportunity for borrowers is likely
to be fleeting.
"This is the sweet spot," said Doug Duncan, chief economist
of the Mortgage Bankers Association, an Washington-based industry group. Unless
the economy slows, Duncan expects rates to rise again when new employment numbers
are released in early February.
With loan volumes still down from their
record levels last year, borrowers should have an easier time getting through
to their lenders -- and may even find their lenders reaching out to them.
"Our loan officers are pretty hungry now," said Robert Couch, president and
chief executive of New South Federal Savings Bank in Birmingham, Ala. "They will
be dusting off files" of would-be borrowers who didn't act last summer. His bank
took 283 loan applications last week, versus just 161 applications the week before
Christmas.
At ABN Amro Mortgage Group, a unit of ABN Amro Bank N.V.,
loan applications doubled last week from the previous week. Lower rates were a
significant factor in that, said Garth Graham, an ABN Amro senior vice president,
though it is also partly a result of people getting to their postholiday to-do
lists.
Michael Menatian, president of Sanborn Corp., a West Hartford,
Conn., mortgage banker, said his firm closed 153 loans in June at the peak of
the refinancing boom. Last month, the firm closed just 17 loans.
When
rates began to drop, Menatian started calling borrowers who missed out on last
summer's low rates to let them know they had one more opportunity to cut their
borrowing costs.
ARMs favored
David Lys,
a health-club trainer and fitness manager, had been looking for a home for about
a year. Last week, he agreed to pay $520,000 for a three-bedroom, two-bathroom
ranch in East Hampton, N.Y.
"It was the rates being so low that got
me started," said Lys, who plans to take out an interest-only mortgage with a
4.625 percent rate that allows him to pay no principal during the early years
of the loan.
Like Lys, many borrowers are opting for interest-only loans
or adjustable-rate mortgages that carry a fixed rate for only the first few years.
Lys's mortgage broker, Melissa Cohn, said she's seen a surge in interest in a
three-year adjustable loan that carries a fixed rate for the first three years,
and then adjusts annually.
Overall, ARMs now account for more than 25
percent of mortgage applications, according to the Mortgage Bankers Association.
"It's higher than what we normally see given where we are in this refinancing
wave," said Westhoff of Bear Stearns, noting that ARMs typically are favored by
first-time home buyers looking to lower their monthly payments. However, banks
aggressively have been pushing these loans this time around -- and consumers seem
more comfortable with them than in the past.
More to spend
Falling mortgage rates in 2002 and in the first half of 2003 allowed millions
of homeowners to slice their monthly payments and pull cash out of their homes.
That, in turn, helped make consumer spending one of the few bright spots during
the recent economic downturn.
Americans saved roughly $27 billion last
year through lower monthly mortgage payments, according to Merrill Lynch senior
economist Gerald D. Cohen.
Loan applications dwindled in the second
half of 2003, as mortgage rates moved upward. Refinancing activity plunged 62
percent in the fourth quarter from the previous quarter, according to the Mortgage
Bankers Association. Mortgage industry employment fell by 1.8 percent in November,
with lenders paring their staffs as business softened.
Borrowers looking
to lock in a low rate now are unlikely to face the kinds of delays that produced
headaches and broken rate locks during the peak of the refinancing boom.
At Chase Home Finance, a unit of J.P. Morgan Chase & Co., turnaround
times for refinances have shrunk to 30 to 60 days. During the height of the refinancing
boom, they were running 60 days to 90 days. Continue
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