Serial refinancers ride falling rates again and again
seattletimes.nwsource.com
By Elizabeth Rhodes
Seattle Times staff reporter
Mortgage interest rates may be hovering at their lowest point in four decades, but Sammamish homeowner Don Corbett isn't thinking it's the best time in years to refinance.
More like the best time in months.
Corbett is among the growing number of serial refinancers riding dropping rates to reap, again and again, the benefits of lower interest payments.
He and his wife, Becky, bought their home three years ago. Having just completed their third refinance, they've seen their monthly house payment slashed by more than $1,000. And they have yet to pay a dime in closing costs, taking advantage, as they do, of their lender's offer to roll points and fees into the deal.
"One adage I subscribe to is: Those who don't understand interest pay it, those who do earn it," says Corbett, a certified public accountant and tax partner with the firm KPMG.
Savvy homeowners like Corbett and Chuck Tessaro, who's refinancing just a year after purchasing his Green Lake home, are pushing mortgage-refinance applications to near their highest level ever. And the end is nowhere in sight, says Phil Colling, economist for the Mortgage Bankers Association of America in Washington, D.C.
The MBA just recorded the nation's 12th consecutive week of heavy refinance volume, a week that saw refinancing activity account for 78 percent of total mortgage applications — just shy of the record set last November.
According to mortgage-money provider Freddie Mac, the average 30-year, fixed-rate mortgage was 6.15 percent last week. Last year at this time it stood at 6.61 percent.
"You have to go back to 1962 or even earlier to find rates where they are now," says Colling. "Where they are now, you have a whole new pool of mortgages eligible to be refinanced."
A multibillion-dollar business
Local homeowners obviously know it. In August alone, King County homeowners completed refinance transactions worth $2.7 billion. What's more, the number of refinance transactions increased 148 percent compared with August 2001, according to First American Real Estate Solutions, a California-based provider of property and ownership information.
The central Puget Sound region — King, Snohomish, Pierce and Kitsap counties — together posted a 132 percent increase in refis in that same period, with 23,728 homeowners refinancing in August, the last month for which statistics are available.
In Bellevue, Phoenix Savings Bank loan officer Julie Hirsch estimates the refinance business is four times normal, with one loan officer she knows doing almost $9 million in total refinance business in just one month recently, and others not far behind. "It was pretty out of control," she says.
Dave Bochsler, regional sales manager for Wells Fargo Home Mortgage, says his staff is "working round the clock." That doesn't seem like much of an exaggeration, considering that in July his region — Washington, Oregon and Alaska — averaged $30 million a day in loan applications. By September that was up to $54 million.
Recently, it's been between $65 million and $70 million daily.
"It's not abnormal for people to refinance twice in the last two years," says Bochsler.
Historically, however, it is abnormal. In his two decades' experience, big refinance booms, which coincide with significant interest-rate drops, usually occur only about every four years.
But 2001 and 2002 both have delivered sweet rates that, as they continue to decline, "increase the benefit to more and more consumers, so that's why it's continuing," he explains.
The refi threshold
Conventional wisdom has been that interest rates must drop 2 percent below a homeowner's current rate before a refinance makes sense. But that's gone by the boards, Bochsler says, because of today's larger loans — a result of high housing prices. "Depending upon the loan size, anywhere from half to three-quarters of a point is enough to move some people to a refi."
He pegs the average loan size in Seattle and the Eastside at $240,000. (By comparison, it's $410,000 in the San Francisco area, which has been a hotbed of refinance activity.)
The higher the loan, the less the rate must drop before benefit kicks in, Bochsler points out. And the more homes that have a high loan balance, the greater the refinance activity will be in that area, he says.
Here's an example of the math involved:
It's July 2001, and a $240,000 loan, at the prevailing rate of 7.3 percent, generates a monthly payment of $1,645. That's for 30 years.
Today these same theoretical homeowners decide to refinance. They can qualify for a 6 percent loan. However if they opt to pay 6.3 percent — exactly one percentage point less than they're now paying — they can avoid paying cash closing costs.
Then their monthly payment drops $178 a month — and they shave almost $40,000 off the total interest they'd pay over 30 years.
Using these same interest-rate numbers, a $100,000 mortgage sees payments cut $74 a month.
(Homeowners can run their own numbers by using calculators available on www.hsh.com, a mortgage-information provider's Web site used to do these projections.)
Many motives
A chance to cut monthly payments is only one reason Hirsch is seeing homeowners refinance.
Some also want to remove mortgage insurance or to shorten the length of their loan to either 15 or 20 years. That has the double benefit of significantly shaving total interest paid while eliminating house payments earlier than the standard 30 years.
Yet another big reason is to tap equity. "Some do it for cash out because they want to make a major purchase or pay off margin loans," Hirsch says. Freeing up money to pay off heavy credit-card debt or finance college tuition are also high on the list.
Then there's the urge to remodel. As the stock market has dropped, housing has emerged as one healthy place to invest, and homeowners know it, Hirsch reports.
Among them are Chuck and Trudy Tessaro. He's an elementary-school teacher; she's an attorney. When they purchased their Green Lake area home last year, they agreed to 7.2 percent interest and figured that they'd be there for no more than five years so it wouldn't make sense to refinance.
"Now we think we'll be here longer," Chuck Tessaro says. "Just looking around the neighborhood, and the home prices being what they are, we can't find a home any less expensive than doing the work on our house."
So they decided that's what they'll do, funneling the $250 a month they're saving by refinancing (at 6 percent for 30 years) into upgrades. Tessaro also figures he'll recoup the closing costs in about 11 months, "so it was well worth it."
Not for everyone
But for some homeowners it isn't, and that's what Kelly Hintz, a Shelter Mortgage loan officer doesn't hesitate to tell individual clients.
"To refinance in most cases, you're going to incur $3,000 to $3,500 in closing costs," he points out. "If you're going to save $100 a month, and it costs $3,500, why would you do that?"
Indeed, Hintz says he's currently receiving "tons of calls" from past clients inquiring about rewriting their notes, but when he runs their numbers he often finds they don't pencil out — even for a so-called "no-cost" refinance.
"That's kind of a misnomer," he says. "There are always costs involved. It just depends on whether you write a check or it's built into your loan amount."
Other reasons to think twice about refinancing:
• A move is planned within five years or so, which may not leave enough time to recoup the cost of a refi if the rate spread is small and fees are paid out of pocket;
• A poor credit history closes the door to the best interest rates;
• The present loan is old and has a low balance. The bulk of the interest has already been paid, and restarting the clock substantially increases the total finance charges, even though the monthly cost drops.
• The goal is to tap equity so deeply that the homeowners would effectively refinance themselves out of being able to sell their house. "That's the thing I find fearful," says Daren Hamilton, executive vice president of The Escrow Group. If folks in this position later need to sell — to avoid foreclosure, for example — "there's no equity left to pay closing costs," he cautions.
Beyond all that, Hintz says homeowners also must be careful not to get wooed into refinancing too frequently by loan officers more interested in making a buck than in helping them. That's called "churning," and it's prohibited by the U.S. Department of Housing and Urban Development, as well as Fannie Mae and Freddie Mac, the nation's two largest mortgage investors.
Thus it's important to carefully consider not just the costs, but the terms of the loan and the reputation of the lender.
That's what Corbett, the Sammamish homeowner, has done. He says he never would have refinanced as many times as he has but for his "unique set of facts." It includes a larger-than-average loan amount. And he always makes sure his note doesn't contain a prepayment clause. "I'd be leery of that; the next thing you know you're paying $5,000 to get out of your mortgage early."
The refi forecast
Just how long the current refi boom will continue remains to be seen. But Wells Fargo's Bochsler says "as long as the reports keep coming out that the economy isn't doing great, and there's a hint of war, we're predicting the same or better rate into next year."
Even so, Corbett doubts he'll refinance again. However, if current trends continue, there will be plenty of other Northwesterners ready to take his place in the refi line.
Elizabeth Rhodes: erhodes@seattletimes.com. |
