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Low Rates Are Back: Should You Lock In?

Staff Reporter of The Wall Street Journal

From The Wall Street Journal Online

Jan. 28, 2004 -- 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%, according to HSH Associates, financial publishers in Pompton Plains, N.J. As recently as early December, mortgage rates were at 6.18%.

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% of borrowers can profitably refinance, says Dale Westhoff, head of mortgage research at Bear Stearns.

The drop in rates should also 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.

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," says Ms. Piccolo, a registered nurse who lives in Avon, Conn. When her mortgage banker called this month, Ms. Piccolo quickly locked in a 30-year jumbo mortgage with a 5.75% rate, well below her current rate of 6.375%. Ms. Piccolo says 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," says Doug Duncan, chief economist of the Mortgage Bankers Association. Unless the economy slows, Mr. 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," says Robert Couch, president and chief executive officer 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 NV, loan applications doubled last week from the previous week. Lower rates were a significant factor in that, says 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, says 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, Mr. 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.

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," says Mr. Lys, who plans to take out an interest-only mortgage with a 4.625% rate that allows him to pay no principal during the early years of the loan.

Like Mr. Lys, many borrowers are opting for interest-only loans or adjustable-rate mortgages that carry a fixed rate for only the first few years. Mr. Lys's mortgage broker, Melissa Cohn, says 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% 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," says Mr. Westhoff of Bear Stearns, noting that ARMs are typically favored by first-time home buyers looking to lower their monthly payments. However, banks have aggressively pushing these loans this time around and consumers seem more comfortable with them than in the past.

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% in the fourth quarter from the previous quarter, according to the Mortgage Bankers Association. Mortgage industry employment fell by 1.8% 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 to 90 days.


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Economic Recovery Supported by Reports

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