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As interest rates fall, more people refinance homes
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Michael Burke
The Journal Times
December 26, 2008
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RACINE COUNTY — Until recently, with the housing market in a deep freeze, a mortgage broker’s job was slow at best.
But lenders are making money again since mortgage rates descended to 6 percent, then 5½, and as low as about 5 percent. The slow days have been replaced by a torrent of refinancing applications from homeowners.
“Johnson Bank, all the branches statewide, have been busier than we have ever been,” said Rick Brandes, senior mortgage officer at Johnson Bank in Racine.
Brandes said the biggest deluge of refinancing applications began last week when mortgage interest rates plunked down near 5 percent. “My sense is that for most people, 5 percent is an unprecedented low.”
The trigger
The trigger for the current rates, he said, came last week when the Federal Reserve both reduced key lending rates and said it was ready to buy large mortgage securities. That combination, Brandes said, quickly knocked interest rates down.
As recently as 12 months ago, home mortgage rates stood at about 6.25 percent, he said. Someone who bought a home then could now drop that rate by at least 1 percent.
And even a half-percent reduction on an average mortgage loan of perhaps $150,000 to $175,000 can make a big difference in the payments, Brandes said.
“Great guns” is how mortgage banker Heidi Conde of Community State Bank described the past few weeks. “Three weeks where people have been inquiring, and two weeks where we’re pulling our hair out.”
When 30-year mortgage rates fell to 6 percent, inquiries started coming in, she said.
More than half of their customers, Conde added, are willing to gamble that even lower rates than this week’s rates of about 5 to 5.5 percent are coming. “We have a lot of people that are not locking their rates,” she said, “because they feel they will come lower.”
Turmoil
Conde said she’s been writing mortgage loans for about 15 years, but in today’s economic turmoil, she doesn’t understand all that may be driving rates to current levels. “It’s the first time in my life I can’t answer these questions.”
Lenders say refinancing makes sense in many, many cases — but not all. Unfortunately, all lenders contacted agreed there’s no rule of thumb that everyone can use.
“Each case is different,” said Don Trottier of M&I Bank, who oversees residential mortgage lending in Racine and Kenosha counties.
Factors that dictate a smart refinancing include equity in the home, length of time the occupant plans to stay there, the applicant’s credit score, whether or not the loan requires an appraisal, and whether the home has lost value since the purchase.
Trottier said his brokers are also seeing homeowners who plan to wait for lower rates before they refinance. It’s not a strategy he likes.
“If you can save money ... take advantage of it today,” Trottier said. If rates rise, people who don’t act before that happens will be unhappy.
He said the Federal Reserve’s cutting of key interest rates is the biggest reason that mortgage rates have fallen, though there may also be other forces at work.
Asked if current mortgage rates could fall even further, Johnson Bank’s Brandes replied, “You never know. Things are happening in this environment that have never happened before.”
Here are three sample refinancing situations, provided by senior mortgage officer Rick Brandes of Johnson Bank.
Each example assumes the home was bought Dec. 14, 2007, when the interest rate was 6.25 percent, and refinanced at 5.125 percent — although interest rates vary day by day until locked in.
The examples are also based on an 80 percent beginning loan (20 percent downpayment) to the home’s value, with a 30-year conventional mortgage loan.
Closing costs will vary based on personal credit score, loan to value and loan purpose.
In all three cases, Brandes has provided figures for a 29-year refinance, so the original length of repayment time remains the same. That is not available with all lenders.
EXAMPLE A
Original mortgage:
$100,000 purchase price.
$80,000 beginning mortgage balance.
$492.57 principal and interest payment.
$79,062.56 current principal balance after 12 monthly payments.
Refinancing at 5.125 percent on a 29-year conventional mortgage:
$79,000 new beginning mortgage.
$436.44 new principal and interest payment on a 29-year conventional mortgage.
Reduction in monthly payments over 29 remaining years = $56.13 per month.
EXAMPLE B
Original mortgage:
$130,000 purchase price.
$104,000 beginning mortgage balance.
$640.35 principal and interest payment.
$102,781.33 current principal balance after 12 monthly payments.
Refinancing at 5.125 percent on a 29-year conventional mortgage:
$102,700 new beginning mortgage.
$567.37 new principal and interest payment on a 29-year conventional mortgage.
Reduction in monthly payments over 29 remaining years = $72.98 per month.
EXAMPLE C
Original mortgage:
$240,000 purchase price.
$192,000 beginning mortgage balance.
$1,182.18 principal and interest payment.
$189,750.15 current principal balance after 12 monthly payments.
Refinancing at 5.125 percent on a 29-year conventional mortgage:
$189,750.00 new beginning balance.
$1,048.29 new principal and interest payment on a 29-year conventional mortgage.
Reduction in monthly payments over the 29 remaining years = $133.89 per month.
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