Recent data from the Mortgage Bankers Association show that refinancing now accounts for almost three-quarters of all mortgage-loan applications.
That’s not surprising. The percentage of total mortgage applications that are refinancings has increased since the first of the year as fixed rates began to drop.
Refinancing has become so common over the last decade that the amount of money it generated for consumer spending probably kept the economy booming for longer than anyone anticipated.
Refinancing was 800 percent higher in the first week of October than at the same time last year, the association said. The association, meeting in Toronto last week, said it expected more than $960 billion in mortgage refinancing this year. The volume will be greater than total mortgage lending in all but four years since 1990.
When rates fall
Historically, rates for 30-year mortgages decline as consumer confidence drops and the economy slows.
For example, in fall 1993, rates for 30-year fixed mortgages were hovering around a 20-year low of 6.77 percent.
Rates fell below that level, to 6.36 percent, in October 1998 in response to turmoil in foreign markets and resulting consumer fears that the good times might be over.
There was little reason to worry, as it turned out. Unprecedented economic growth continued, and long-term rates rose.
These days, there is reason to worry. The events of Sept. 11 `and the new uncertainty in the economy caused by those events,” in the words of association economist Phil Colling, appear to have convinced a lot of people to get off the fence and refinance.
The turmoil in the stock market and nervousness about overseas investments have benefited fixed mortgage rates because investors have been shifting from stocks to Treasury bills and mortgage-backed securities.
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More money in the bond market lowers yields and long-term mortgage rates.
More cuts likely
The Federal Reserve will likely continue cutting short-term interest rates. The government will increase spending as an economic stimulus, and both could put upward pressure on long-term interest rates, but not enough pressure to send rates substantially higher.
David F. Seiders, chief economist of the National Association of Home Builders, said he expects 30-year fixed mortgage rates to remain at 6.6 percent throughout the fourth quarter. One-year adjustable mortgages should be less than 5 percent, he said.
Unfortunately, “housing has ceased to be one of the props holding up the economy,” Seiders said. “We’re participating in the slowdown.”
That will mean fewer mortgages to buy houses and an even larger increase in refinancing in the coming months.
Who should refinance?
Peter Miller, author of “The Common Sense Mortgage” (Contemporary Books, $16.95), said anyone looking at today’s mortgage rates and terms would be surprised at the options.
“The loans that are available have rates below those most people are paying now,” Miller said. “There is financing available with no cash at closing, so you don’t have to pay expenses out of pocket.”
The costs of `no-cost’
There is a caveat, however. Some of the no-cost or zero-financing loans mean that you’ll be paying for the refinancing through higher principal or higher interest rates.
The money you’ll be saving each month should more than compensate for the higher initial costs.
“The issue is monthly savings versus up-front costs,” Miller said. “If it costs you $3,000 to refinance and you save $50 a month, it will take you 60 months to recoup the up-front costs.”
Many people refinance to pull equity out of their houses — called a “cash-out refi.” Then they use the money to finance vacations, consumer purchases and college educations.
These people aren’t refinancing to save money, but rather are borrowing against the house to have money immediately. Tapping into equity, therefore, usually means higher loans and higher payments.
Use that savings
Instead, Miller suggests that, if you refinance and save $100 a month in interest, you should use the money to prepay your mortgage — making sure that the loan comes with no prepayment penalty.
“Thus, by getting a lower interest rate, you can accelerate the repayment of the loan,” he said. By doing so, you often save thousands of dollars in interest over the shorter life of the mortgage.
And by doing so, you are actually saving for a rainy day (by having more equity in your house) — if the value of your house increases over time, of course — to buy another house or for retirement.
If you wish to spend the equity on other things now, you can get cash out or obtain a home-equity line of credit.
Before Sept. 11, the Mortgage Bankers Association reported that half of all cash-out refinancings were for consumer spending. There are no statistics yet for the five weeks after Sept. 11, but indications are that consumers are hanging on to that money, given the increase in the jobless rate and other factors.
A home-equity line of credit is a revolving loan that works like a credit card. Most loans are usually 75 percent of equity, which is defined as appraised value minus the balance on your first mortgage.
These loans are typically adjustable-rate instruments, based on the prime rate (which can change) plus margin (which doesn’t). A fixed-rate home-equity loan can cost more than an adjustable-rate loan.
Not much of a deal
Home-equity loans aren’t much of a deal these days. The prime is 5.50 percent. Add to that a margin of, say, 2 percent, and the rate you are paying is 7.50 percent — 1 percentage point higher than the going rate for a 30-year fixed mortgage.
Should you go adjustable or fixed-rate when refinancing?
Miller suggests fixed because the difference between adjustable and fixed rates is only about a percentage point, and adjustables, well, adjust up as well as down.
“If you are interested in an adjustable, look into an FHA adjustable,” he said. “The amount you can borrow is limited, but the terms are attractive.”
What costs are involved in refinancing? No matter what the fees are called, they still represent costs in dollars and cents.
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For example, you will be paying for a title search and title insurance, “but if you bought or refinanced within the last five years, you might be able to get a lower reissue rate,” Miller said.
The old title insurance policy doesn’t cover things that may have occurred since you bought your property, such as obtaining a second mortgage or liens against the property for unpaid home improvements.
A new appraisal
You’ll also have to pay for an appraisal. HSH Associates in Butler, N.J., which tracks the rates of 2,000 lenders nationwide, said the cost of an appraisal on a first mortgage in the third quarter of 2000 was $305.
There are no 2001 figures, but appraisal costs only changed a few dollars one way or the other in the previous two years.
“Be sure you are getting a good appraisal,” Miller said. “If the appraiser makes his determination [from] a car, you aren’t getting your money’s worth.”
Remember, the appraiser works for the lender, not the consumer, so the appraisal tends to be conservative. The lender is trying to minimize risk. Whatever the fees are called, get a list, with each explained.
The refinancing boom in 1993 caught the industry unprepared, and, faced with $1.3 trillion in total applications, processing ground to a halt.
A similar boom in 1998 did not create similar problems. Computerization of the lending industry — especially Fannie Mae and Freddie Mac — has accelerated the approval process.