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Mortgage Fever
by Teresa McUsic
Fort Worth Star-Telegram, August 25, 2002
Dzevat Prelvukaj came to Keller from Albania to seek the American Dream. In July, he joined the hundreds of thousands in this country playing what is fast becoming a new American pastime: refinancing their home loans.
Rates for home mortgages have fallen this month to their lowest point since 1965, with some rates as low as 5 percent. And many Texas homeowners are finding that high-tech gadgetry - from electronic signatures to Web sites that provide daily checks on the best rates - are giving this round of refinancing a new fever.
Prelvukaj, for example, was able to cut the term on his 30-year loan to15 years, trim his interest from 8.7 percent to 5.6 percent and - with a capital infusion of $17,000 - keep the same monthly payments on his $140,000 home.
"It was easy," said Prelvukaj, owner of Joes Pizza in Keller, who checked interest rates regularly using his computer.
The combination of low rates and improved service have led to a surge in local business, according to Tarrant County' leading mortgage lenders.
Wells Fargo Home Mortgage, the nationals largest residential lender, experienced a 50 percent increase in mortgage applications locally in June and July, said Walter Edler, the companys area manager for Tarrant County. August business has already doubled that amount, he added.
Colonial National Mortgage, another local mortgage leader, has experienced an uptick of about 20 percent in applications since July, said Dave Motley, executive vice president of the Fort Worth based lender.
"Its a very, very competitive market right now," Motley said. "Prices are slashed to the bare bones."
Last week, Colonial was offering 5.25 percent for a conventional 15-year note; 5.75 percent on a 20-year note and 5.87 percent on a 30-year loan of $100,000, with estimated closing costs of $2,100, according to calculations on their Web site.
In addition to consumers refinancing their loans, some buyers are finding that they can afford larger homes thanks to the rock-bottom rates. To capitalize on this market opportunity, Colonial started a new product last week giving an extra half point discount to anyone buying a home after Aug. 15.
For example, Colonials 30-year fixed rate mortgage on a $200,000 home last week had an interest rate of 5 7/8 percent with a ½ point discount.
"Its the equivalent of an eighth of a point of the interest rate," Motley said. "Were trying to do what the Federal Reserve wouldnt do."
Another attractive package being offered is from the Federal Housing Administration, said Judith Smith, president of the Judith Smith Mortgage group in Fort Worth. The FHA has a two-one buy-down starting at 6.5 percent for first-time homebuyers, she said. Under the program, the first year interest rate is 4.5 percent; the second year is 5.5 percent and the third year is 6.5 percent.
One hiccup to refinancing this time around involves homeowners who have taken out home equity loans in the last four years. The state law that established home equity loans in 1998 has certain restrictions that follow a homeowner even through refinancing. The Texas Mortgage Bankers Association is working to try to get some of those parameters changed in next years legislative session, but that wont help this year.
First and foremost, when a homeowner takes out an equity loan on a primary resident, every mortgage refinancing after that must adhere to the parameters of the equity loan, Motley said.
One restriction requires the refinanced mortgage to carry a fixed rate. However, the Texas Supreme Court has ruled that homeowners with an equity loan are allowed to access adjustable rate mortgages. Still, Motley said homeowners with an equity loan are not able to refinance with a balloon payment feature.
Also, the maximum closing cost on an equity loan by law is 3 percent. If closing costs turn out to be more than that in a refinancing deal, the mortgage company might have to give you a higher interest rate to offset the closing fees.
Another restraint: Equity loans can only be made once a year. So if you took out an equity loan last January, you cannot refinance your home until next January, Motley said.
Despite the limitations, Colonial is seeing a large number of equity loans, Motley said. Typical reasons for the loans are to pay for college or consolidate credit-card debt, he said.
Data from a recent study by the Mortgage Bankers Association of America confirms an increase in the equity mortgage, or cash-out refinancing. The average loan size for refinancing transaction reached a record of $215,000 in June, compared with $173,600 a year ago.
And Edler suggests not abiding by the conventional wisdom that homeowners shouldnt seriously look at refinancing until the rate drops at least 2 percentage below the interest rate on the current loan.
"Thats an old wives tale," he said. "It doesnt take into consideration the time aspect of being in a home." For example, he said a one-percentage point reduction in an interest rate can make sense if youre going to be in the home for 10 years.
A simple formula of dividing how much you save per month on house payments by the cost of refinancing will tell a homeowner how long it would take to get his investment back, Edler said.
Will these favorable mortgage rates hold? The answer to that depends on whom you ask.
Although the Federal Reserves actions play into the movement of mortgage rates, its not the only factor. As investors bail out of the stock market, some of that investment money is going into mortgage-backed securities, causing prices in this investment vehicle to surge, according to the Mortgage Bankers Association.
"High prices mean lower rates, and these lower rates are being passed on to borrowers," said Doug Duncan, the MBAs senior vice president and chief economist in a mid-year mortgage financing forecast released last week.
The MBA predicts a record high volume of mortgages, not including refinances, of almost $1 trillion this year nationally. Meanwhile, refinancing volume is expected to reach $889 million.
Duncan predicts that the Federal Reserve will not increase short term rates until at least November, and he does not see anything but a moderate increase in mortgage rates through the end of the year.
Wells Fargos Edler says its too hard to call.
"Too many people play the rate game," he said. "Ive seen the market move two points in a matter of a week. If your rates makes sense now in your financial picture, run, dont walk."
Judith Smith agrees. "Dont get greedy," she warns. "Nobody knows whats going to happen to the rate."
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