Thursday, August 20, 2009

To refinance or not to refinance. THAT is the question.

By Carol Hazard

Homeowners are saving hundreds of dollars a month by refinancing their mortgage loans at interest rates near record lows.

Some are pumping the extra money into savings, using it to bolster spending or making home improvements. A Midlothian couple may splurge on a trip to Disney World for their three children, now that they have $400 more a month.

Not everyone qualifies for a refinance in these days of tight underwriting standards. Plus, a refinance doesn't always make sense, depending on costs and how long it would take to recoup them.


Still, the local and national economies are getting a boost from the jump in refinancings.

Mortgage lenders, after about three years of cutting staff or closing doors as the loan-origination business slowed, are busy trying to meet rising demand. Many are hiring.

Rates for conventional fixed-rate mortgages hit 4.89 percent earlier this month on a 30-year conventional mortgage -- a record low for a weekly survey since 1990 by the Mortgage Bankers Association.

The most recent weekly survey, released Thursday, shows the average contract interest rate for a 30-year fixed increased to 5.24 percent from that record low. Mortgage rates often change daily.

"This week's rise in rate might be a temporary bump," said Holden Lewis, a senior reporter for Bankrate.com, a financial rate data researcher.


What does the boom mean for homeowners?

Richmond residents Alex and Ellen Vance locked in a 4.325 percent interest rate in December on a 30-year fixed-rate mortgage, paying an origination fee to get such a low rate.

"I remember being in my 20s [in the 1980s] and getting my first house and being thrilled to get 12.5 percent," Ellen Vance recalled.

This rate was too good to pass up, even though she and her husband were not in the market to refinance. They had redone their mortgage as recently as March.

With her husband taking early retirement to pursue another career and her son a couple years from college, the Vances felt more financially comfortable stretching their mortgage payments over 30 years, she said.

In their March refinance, they switched from a 15-year loan to a 30-year mortgage.

Their latest refinance, which recently closed, will drop their monthly payment by another $200 a month, which they say they will put into savings and investments.

David Shea, who lives in Richmond's West End, said he watched mortgage rates edge up last year from 6 percent to 7 percent.

"All of sudden, they started dropping and I jumped." That was in October, before the refi boom kicked in.

Shea changed from a variable rate, which had fluctuated to about 7.5 percent, to a fixed 30-year rate of 5.75 percent.

Sandy and Jill Wiggins of Midlothian locked in a 4.75 percent interest rate on a 30-year fixed-income loan, down a full percentage point from what they had.

Their mortgage payment dropped by about $300 a month. "We're good savers, so we'll save but we'll spend some, too. You have to help the economy."

What does the boom mean for lenders and others?

"The main mortgage services are jammed with phone calls," said Steve Mills with Wells Fargo Home Mortgage's branch office in Midlothian.

SunTrust Mortgage Inc., based in Richmond, took in $9 billion worth in loan applications in December, double the amount in November, said Sterling Edmunds, president and chief executive officer.

"We're seeing the volume increase everywhere except in places that had significant price declines such as in Florida and parts of California," he said.

SunTrust has hired more than 100 underwriters companywide to deal with the rising demand, Edmunds said.

A refinance could be done in 30 days a month ago, he said. Customers can expect a 45-day process now, with demand creating a logjam in processing applications.

Wells Fargo's Mills said refinancings help a segment of the housing market.

"Refinancings are a nice little boon for mortgage companies. But the builders and real estate agents aren't seeing a boon."

The housing industry won't stabilize until first-time homebuyers get back into the market, he said.

"Last week, we were closing [refinance] loans at a fixed rate of 5 percent for a 30-year mortgage," said Brad Hustead, president of Sterling Mortgage Corp. in Richmond.

"That's impressive and can save people a lot of money now and in the future, but we haven't seen the rush to apply like we have in the past. It appears there is still a lot of nervousness in the consumer's mind."

Lenders and borrowers aren't the only ones riding the refi surge.

A refinance typically requires a property appraisal.


"We are busier now than we have been in 10 to 15 years," said Pat Turner, owner of P.E. Turner & Co., a residential appraisal company in Henrico County.


During the housing boom, which ended in 2006, some lenders relied on automated and online valuation models to determine loan amounts instead of onsite inspections.


"We're seeing a lender flight to quality," Turner said. Lenders, many of whom were burned by inflated appraisals during the housing boom, are seeking thorough valuations as property values continue to fall.



How low can rates go?

No one knows how long low rates will last, but they are not expected to go away anytime soon, SunTrust's Edmunds said.



"We don't think this is short-term as long as the government is committed to driving rates down to 4.5 percent and below," he said. "There is so much out there that could be refinanced."



The U.S. Treasury, as part of the Emergency Economic Stabilization Act of 2008, was given the power to buy mortgage-backed securities from institutions across the country to unlock the credit markets.



Government purchases of mortgage-backed securities began in early January. They are a major reason why mortgage rates have fallen below 5 percent, said Kent Engelke, chief economic strategist with Capitol Securities Management in Richmond.



"Yes, I believe there is a distinct probability of a 4 to 4.25 percent rate on a 30-year mortgage," he said.



The 30-year mortgage is tied to the 10-year Treasury. "The 10-year is trading at a 2.6 percent yield, which suggests a 4 percent mortgage rate," Engelke said.



Such a low rate would greatly increase the odds of a recovery in the housing market, he said.



Engelke said he expects rates to fall to new lows in the next 30 to 90 days, barring any unforeseen event that causes the 10-year Treasury to trade substantially higher.



Another deterrent to even lower rates would be "an event that erodes the fragile confidence emerging in the credit markets," he said.



Who qualifies?

The best rates usually are reserved for people with credit scores of 740 or higher.



That doesn't mean people with lower scores wouldn't qualify for refinances. However, they wouldn't necessarily be able to get the lowest interest rates.



It's a widespread misconception that no one with a score of less than 700 would qualify, said Hustead with Sterling Mortgage.



Hustead said he sees a lot of scores in the high 700s and low 800s, but people with credit scores of a least 620 should not have trouble getting refinance loans, depending on income and amount of equity they have in their houses.



"Interest rates can vary a full percentage point or more when considering the borrower's credit score, loan-to-value, refinance type, property type and whether a current home equity line or second mortgage will be paid off," said Tim Estes, president of Professional Mortgage Corp. in Richmond.



Credit reports are based on information compiled by TransUnion, Equifax and Experian. Free copies are available once a year through http://www.annualcreditreport.com



But even high scores don't automatically qualify people for a refinance.



If loan amounts are high relative to the value of their houses, borrowers won't necessarily get the best rate.



Nor would they be eligible at all -- regardless of credit scores -- if they are upside down in their mortgages, owing more than their houses are worth.



Upside down mortgages are not widespread in the Richmond area, but not unheard of either, lenders say.



"The Richmond area is going very strong with lots of applications and volume," Edmunds said.



Borrowers can expect to provide information to verify income and debt levels. The days of noor low-documentation are over.



Homeowner Danielle Timmons of Mechanicsville said the application process required patience and extensive documentation. But she wanted to do better than her mortgage loan with a 6.5 percent interest rate.



"Wells Fargo continued to request document after document, despite having known me and my credit for over 12 years," she said. "It's important to note my credit score falls in the excellent category, so getting approved for refinancing was never a concern."



An appraiser spent more than an hour, taking copious notes, she said. The house was appraised for $15,000 more than she paid for it in May 2006.



"I was pleasantly surprised considering the state of the economy and the housing market."



She walked away with a fixed-rate 30-year mortgage, an interest rate of 5 percent -- and a monthly savings of $400.



Does a refinance make sense?

Borrowers need to consider closing costs to determine whether to refinance and how long they think they will stay in their houses, Wells Fargo's Mills said.



It can take a couple of years to recoup the cost of the refinance.



Some costs are fixed and some are based on the loan amount, said Alicia O'Brien, president of the Mortgage Bankers Association of Richmond and a senior loan officer at Prosperity Mortgage.



"Every situation is different," she said.



In general, people can expect to pay costs of 2 percent of the loan amount, unless the refinance is done through the original lender who can reduce costs, she said.



Most borrowers roll expenses to refinance back into their loans. Doing so is not a no-cost loan, Mills said.



Also, "if they pull cash out, they will take a little bit of a hit on interest rates."



Source



Refinance is really a good option if you want to save money. A lot of people have taken advantage of the record low interest rates lately.

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