LOWER interest rates create refinancing boom

Wednesday, May 16th 2001, 12:00 am
By: News On 6

WASHINGTON (AP) _ Americans are taking advantage of falling mortgage rates and refinancing their homes in droves _ a boom that is likely to make 2001 the second-biggest year ever for refinancing.

Mortgage rates are down more than a percentage point from a year ago, making it attractive for many homeowners to redo their loans.

By refinancing, people swap higher-interest debt for lower-interest debt, allowing them to trim monthly payments. With the savings, people might opt to buy things, pay off bills, invest the money or deposit it in a savings account.

Or, some take out a bigger loan, using it to consolidate household debt, pay for home improvements or maybe buy a new car _ and enjoy a tax deduction to boot.

``Refinancing has really shot up dramatically because there are quite a few mortgages with interest rates of 7 percent or higher. Business is so good that we are hiring people,'' said Sung Won Sohn, chief economist at Wells Fargo, a major provider of residential mortgages.

For the week ending May 11, the average rate on a 30-year fixed-rate mortgage was 7.10 percent, according to Freddie Mac, the mortgage company. A year ago, the 30-year rate averaged 8.52 percent and hit a five-year high of 8.64 percent one week later.

A person with a 30-year mortgage at 8.5 percent would pay $769 a month on a $100,000 loan. At 7 percent, the person would pay $665 a month for a $100,000 loan, according to figures supplied by the National Association of Realtors. Thus, a person who took out a mortgage near the peak level last year would save $104 a month by refinancing at current rates.

Mortgage rates began their descent last fall and really showed some big declines earlier in the year. The average interest rate on a 30-year mortgage, for instance, fell below the 7 percent mark six different weeks this year. Fifteen-year fixed rate mortgages and one-year adjustable rate mortgages have been below 7 percent all year long.

Freddie Mac says 15-year mortgages, a popular option for refinancing, averaged 6.61 percent last week, compared with 8.17 percent for the same week last year. One-year adjustable rate mortgages averaged 5.90 percent last week, down from 6.96 percent a year ago.

The Freddie Mac rates do not include add-on fees know as points, which averaged around 1 percent of the loan amount for all three type of mortgages.

Many experts predict that mortgage rates in the coming months aren't likely to post any dramatic drops, and instead probably will hover in the range they are in currently.

``It's been quite a wave of refinancing. But I think we may have seen the crest,'' said Stuart Hoffman, chief economist at PNC Financial Services Group. ``That's because I don't think there will be any really big tumbles in rates.''

Given that, experts believe refinancing activity may slow in the months ahead but still remain brisk.

Even factoring that in, mortgage refinancing activity is expected to total more than $600 billion this year, second only to the 1998 mark of $750 billion, says Doug Duncan, chief economist for the Mortgage Bankers Association of America. Last year, just under $200 billion worth of mortgages were refinanced.

So when should a person even considering refinancing?

Experts say a rough rule of thumb is that your new interest rate should be 1 percentage point lower than your current one, if you also want to recover any upfront costs, such as those related to closing or points. People also need to consider tax implications and how long they intend to stay in their home, experts say.

``Let's say you save $100 a month if you refinance, and you have $3,000 of upfront costs, then it would take you 30 months to recapture the upfront costs. So you need to stay in the house for 2 1/2 years. If not, you shouldn't refinance,'' said Duncan.

The housing market has stayed solid though the economy remains mired in a slowdown that began to take hold in the second half of last year. Lower mortgage rates has been the main factor keeping housing activity stable.

The latest evidence of the market's resilience came Wednesday with a Commerce Department report showing that new housing construction rose by 1.5 percent in April, leaving economists to marvel at the market's strength.

The slowdown hasn't hurt the value of people's homes, which have appreciated quite a bit in the last two to three years, Duncan said.

``Some people refinance just to lower their monthly mortgage payments, but others refinance to get some cash out because their house has gone up in value,'' said Robert Van Order, chief economist for Freddie Mac.

Trying to keep the economy afloat, the Federal Reserve slashed interest rates by another half-point on Tuesday, the fifth reduction of that size this year.

The Fed's rate decisions directly affect mortgage rates in setting the levels of one-year adjustable rate mortgages and indirectly through the Fed's influence on longer term rates that bond markets set. Some mortgage bankers said there's a chance 30-year and 15-year mortgages could edge up in coming months if yields continue to rise on 10-year Treasury notes to which the longer-term mortgages are linked.