Refinancing Fever Spreads as Interest Rates Plummet

When Todd Dean and his wife bought their La Habra Heights home in 1982, mortgage rates were sky high. To buy the home, the couple took one loan at a 13.5% fixed rate and a second at 16.5%.

Last year, when interest rates began tumbling, they refinanced both loans at a 12% fixed rate. They were satisfied--at least for a few months.

Now, with a chance to refinance again, this time at 9.875%, the Deans are jumping at it.

“Saving $300 a month is pretty nice,” Dean, a 31-year-old pet-supplies salesman, said of the estimated drop in his monthly payment. “If mortgage rates go down another two points in the next four or five months, I’ll consider refinancing again.”

Cashing in on the first single-digit fixed-rate mortgages available in nearly eight years, homeowners nationwide are flocking to refinance existing mortgages. Many savings and loan associations, mortgage bankers and other lenders report record volume in refinancing applications, with phones at some institutions ringing off the hook while employees work six-day weeks to handle the surge.

“Everybody’s thinking about doing it,” said Jack Grigsby, chairman and president of the residential mortgage arm of Coldwell Banker, a Los Angeles-based real estate brokerage firm.

“It’s a massive psychological breakthrough in consumers’ perceptions, seeing single-digit rates for the first time in seven or eight years,” said Robert K. Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter.

The refinancing boom comes also as lower rates are boosting new home sales, which in January hit their highest levels in more than two years.

The billions of dollars that consumers will eventually save will boost the economy through higher retail sales, investments and purchases of other homes, experts say. Some consumers report lowering their monthly payments by as much as $500. Others use refinancings to shorten loan maturities, switch from adjustable-rate loans to fixed-rate loans, finance remodeling projects or borrow for other investments ranging from stocks to prize horses.

Consumers should expect to save even more soon, experts say, as intense competition for refinancing business prompts lenders to cut fees or offer other incentives. Several California S&Ls; have cut origination fees to 1.5 points, or 1.5% of the loan’s value, from two points; at least one charges no points at all on certain loans. The industry average has been about 2.5 points.

12% Used as Bench Mark

Experts say homeowners with mortgages above 12% generally are benefiting if they refinance now.

“At these current rates, refinancing is very attractive to anybody who borrowed money in the last five years,” said Sigmund Anderman, president of CompuFund, a computerized mortgage-search firm in Santa Ana that has seen its volume more than double since November.

“It’s a no-lose situation,” said Gayle Sherry, a housewife in Hudson, Ohio, south of Cleveland.

She and her husband used their refinancing not only to lower their monthly payment by $150, but also to borrow an additional $11,000, which they invested in an Arabian horse. The refinancing also allowed them to switch from an adjustable-rate mortgage at 13.25% to a fixed-rate mortgage at 10.75%.

The lower rates are particularly a godsend for borrowers in danger of defaulting on loans taken out three or four years ago when rates were as high as 17%. Lenders are encouraging these troubled borrowers to refinance rather than default.

“Paying $200 or $300 less in monthly payments really makes a difference for many people,” said Rebecca Marek, head of mortgage banking at First City National Bank in Houston, where the oil-industry slump has forced many homeowners to default.

Wary of Repeating History

But the trend is not necessarily good news for lenders. While fees from writing new mortgages could boost S&L; profits this year to record highs, some experts worry that a return to low, fixed-rate lending may eventually lead to a repetition of some of the woes that caused a fourth of the nation’s S&Ls; to collapse or merge in 1981-82. Rising interest rates then forced many S&Ls; to pay more in interest for deposits than they were earning in interest on loans.

“If we originate a lot of fixed-rate loans at low interest rates, then similar types of problems could crop up again,” said Warren Raybould, senior vice president for residential lending at California Federal Savings & Loan in Los Angeles.

To reduce the risk, many S&Ls;, particularly in California, cut or eliminated fixed-rate lending during the last few years. Instead, they promoted adjustable-rate loans, which were popular in the early 1980s when interest rates were high.

But resurgent consumer demand for fixed-rate mortgages has forced many S&Ls; to increase fixed-rate lending to get the business. For the first time since mid-1983, most new loans are fixed instead of adjustable. To maintain the lure of adjustable-rate loans, some lenders sweeten the terms by reducing their profit margins--in effect, lowering the initial interest rate--or by lowering caps, which limit how much the adjustable rate can rise.

Other experts, however, minimize the potential problems. Although S&Ls; are writing more fixed-rate mortgages, they are selling most or all of them to other institutional loan buyers, these experts contend.

For example, Great Western Savings of Los Angeles, one of the nation’s largest mortgage lenders, recently began offering a 30-year fixed-rate mortgage for the first time since 1975, spokesman Ian Campbell said. But it sells all of them to other buyers, such as pension funds, investors or the Federal National Mortgage Assn. (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac). They, in turn, use these mortgages to back securities sold to investors.

9% Rate in Houston

Such securities, with yields above 9%, “are selling like hot cakes,” said Michael Lea, chief economist for Freddie Mac, which has bought record volumes of mortgages in recent months.

One of the lowest rates nationwide is at Houston’s First City National Bank. It offers 9% on 30-year and 15-year fixed-rate loans, but charges origination fees of five and four points on those loans, respectively.

“We’re working as many hours as there are in the day just to handle the business,” First City National’s Marek said. The bank has hired temporary employees, and they and others are working Saturdays to process applications, she said.

In California, San Diego-based Great American First Savings is offering a 9.5% 15-year fixed-rate mortgage and a 9.75% 30-year fixed-rate loan. Other California institutions offering sub-10% rates include Home Federal Savings, First Interstate Bank of California and American Savings.

Adjustable-rate mortgages are as much as 1.5 percentage points lower than fixed-rate loans. Rates also are lower on 15-year mortgages versus 30-year loans.

Financial planners and other experts say that, as a general rule, homeowners should refinance if they can lower their existing mortgage by two or more percentage points and if they plan on living in their residence for at least two years. Generally, that is how long it takes for the homeowner to recoup the fees.

$3,300 Buys $100,000 Loan

A typical example of fees are those at California Federal. For a $100,000 loan, the Los Angeles S&L; charges about $3,300. That includes two points ($2,000) for loan origination, a $200 application fee and about $1,100 for other fees, including title examination and insurance, deed recording, appraisal, survey and credit checks.

Under those conditions, a borrower refinancing a 12% loan at 9.75% would save about $160 a month on his loan payments and thus would need 20 months to recoup the fees.

However, some institutions allow customers to choose higher origination fees and a lower interest rate, or lower fees and a higher rate. Los Angeles-based Home Savings of America, for example, offers an 8.75% adjustable-rate mortgage with 1.5 points and a 10.75% adjustable loan for no points.

Financial planners say it may be cheaper for a borrower to refinance through his existing lender because the lender already knows the customer’s credit history.

For example, a borrower might save on legal and appraisal fees through his existing lender, said Kenneth Cymbal, a senior financial planner at New England Financial Advisors in Boston, a unit of New England Mutual Life Insurance Co. However, he said, these savings might be offset if the lender charges higher rates or other fees.

Not Without Drawbacks

“There is such a disparity in rates, the best advice is to shop around,” said Christopher Croft, manager of financial advisory services at Bailard, Biehl & Kaiser, a San Mateo-based investment advisory firm.

Experts caution, however, that there are potential drawbacks in refinancing. For example, nearly all new fixed-rate loans are not assumable, except those backed by the Federal Housing Administration or the Veterans Administration.

In addition, some homeowners might be forced to put up additional cash to increase the size of their equity. Lenders typically require 20% equity for refinancings.

Finally, the experts add, interest rates might tumble further, making it advantageous to wait before refinancing.