Homeowners nationwide are rushing to refinance their home loans as interest rates have dropped to their lowest level in four years.
Mortgage bankers around the country report a surge in refinancings as the national average for a conventional 30-year fixed-rate mortgage slipped below 9.5 percent last month.
Refinancings now account for about 40 percent of mortgage activity nationwide while mortgages for home purchases make up 60 percent. Refinancing enables homeowners to cut their monthly house payments or be rid of fluctuating adjustable-rate mortgages.
Trading in an old loan often makes sense if the new fixed-mortgage rate is at least 1.5 percentage points less and you cover the costs of refinancing within three years. For example, a homeowner with a $200,000 mortgage at 11.25 percent with a monthly payment of $1,942.52 would save $300 a month by refinancing his mortgage at 9.25 percent.
More homeowners also are "cashing out" -- taking out a bigger loan and using the extra money for other expenses, said Gary Zimmerman, an economist for the Federal Reserve Bank of San Francisco.
The volume of all home loans -- refinancings as well as new loans -- is likely to grow to $435 billion this year from $415 billion last year, according to the Mortgage Bankers Association in Washington.
"Last week was probably our busiest week in two years," said John Battaglia, a vice president at Boston Five Cent Savings Bank.
But Battaglia suspects the rate of refinancings would be even higher had it not be for the tenuous real estate market.
"We're seeing a lot of people calling in and saying, 'I have a $200,000 house that I bought two years ago and I have a mortgage on it for $180,000. I think the house is only worth around $180,000 now. What should I do?'" said Battaglia. "It's
The homeowners described in that scenario were told to stick with their current mortgages because they'd only be eligible to receive around $162,000 in a refinanced loan, or 90 percent of the current value of that home under standard bank guidelines. To refinance they'd have to come up with an additional $18,000 -- the difference between what's approximatly left on the original mortgage and the new money that would be provided -- as well as closing costs and other fees.
Sometimes financial institutions may bend the rules. "Some lenders will refinance their own loans without a new appraisal," usually for their most credit-worthy customers, said Ross M. Strickland, executive vice president at Northeast Savings in Hartford, Conn.
But more than likely the banks would reject such an application.
However, some homeowners may find themselves unable to refinance because they have not yet paid off enough principal to qualify for a new loan or the value of their homes may have declined.
The big losers are those who bought when home prices peake in the late '80s. Not only are they unable to sell now without taking a substantial loss, but they've been denied a chance to become more financially comfortable where they are.
Most banks won't lend out any more than 80 percent to 90 percent of the current appraised value of a home, so when values decline, that makes less money available for refinancing.
"They're in a catch-22 right now: They can't sell because they won't make their money back and they may not be able to refinance ... because they may not qualify," said John Hickey, senior mortgage underwriter for First Trade Union Savings Bank of Boston, an area hard hit by slumping housing prices.