When Dr. Claudio Levin built his French country-style house five years ago, he took an 11.5 percent mortgage. When he refinanced last summer, his rate was reduced to 9 percent. Now he's refinancing again, and his rate is down to 7.5 percent.
"It's easy," said Dr. Levin, a Reisterstown internist. "It's no hassle. And I don't have to lay out any cash."
Like Dr. Levin, thousands of American homeowners have found it worthwhile to go through the mortgage refinance pipeline once, twice or even three times during the past 18 months to cut their monthly payments or shorten the term of their loans.
That means more business than ever for banks, S&Ls; and the burgeoning array of mortgage banking firms that seek to capture a piece of the gigantic refinance market through newspaper ads, TV commercials, direct-mail campaigns and even telemarketing.
Until recently, conventional wisdom had it that homeowners didn't stand to benefit from a mortgage refinance unless they could cut their mortgage rate by 2 percent, stay in the house at least two more years and spend less than $2,000 in closing costs on the new mortgage.
Some mortgage specialists question whether the so-called "2-2-2 rule" ever applied. But certainly it no longer does, they say, because of the availability of low-cost or no-cost refinance programs.
"All that's out the window," said Keith Gumbinger, a vice president at HSH Associates, a New Jersey firm that tracks the mortgage market.
"It doesn't make any sense to look at the old rules of thumb because they simply do not apply."
"It can make sense to refinance for as little as a quarter-point if you can do it with no cost, or be in the home long enough to more than recoup your costs," Mr. Gumbinger said. Even short-timers with relatively low rates could benefit, he said.
He gives this example: A homeowner has a $140,000 fixed-rate, 30-year mortgage at 7.5 percent that he took out late last year when he refinanced. He plans to move to another state in just a year. He has the opportunity to take out another 30-year mortgage -- this time a no-cost adjustable with a first-year rate of just 4 5/8 percent. In doing so, he cuts his payments by nearly $260 a month.
Of the $3 trillion in mortgage debt now outstanding in the United States, one-third is at interest rates of 8 percent or above, reports the Mortgage Bankers Association of America, the Washington-based trade group.
But despite the potential advantages, only a small fraction of those who have already refinanced their mortgages once have gone to the well a second time, mortgage specialists say. Just 5 percent of the homeowner population that could enjoy some financial benefit have gone through the elaborate process a second time in the past 18 months, Mr. Gumbinger estimates.
Some homeowners simply don't think that the headaches of refinancing make it worthwhile to repeat the process for a relatively small financial gain. "There's a lot of grief and aggravation to go through a refinance -- even if you qualify," Mr. Gumbinger said.
To their disappointment, many Americans cannot qualify for the right to refinance their housing obligations.
Many of those who could benefit from a first, second or third refinancing cannot do so because they have lost one source of family income or their credit has deteriorated, Mr. Gumbinger said.
Another, smaller class of would-be refinancers can't go forward because their homes have declined in value since they bought them, said Brian Chappelle, a staff vice president for the Mortgage Bankers Association.
But in the Baltimore-area, there are enough legitimate refinancing applicants to keep mortgage lenders' phones ringing.
With the opportunity to roll closing costs into the financing package -- or to take out one of the increasingly popular "no cost" or "low cost" loans -- many borrowers are finding savings even with a drop in their mortgage rate of less than 2 percentage points.
Bought split foyer
One such case involves Lisa Van Sant, who bought a split foyer in Jarrettsville with her husband, Michael, five years ago.
The original mortgage on the house was 10.5 percent. Last year the couple refinanced at 8 3/4 percent. Now they're reducing their rate again, to 7 1/8 percent. As a result, a monthly house payment that started at $1,250 is down to $850.
And the Van Sants have achieved this personal-finance miracle without an overly high cost. That's because they willingly accepted a slightly over-market mortgage rate in exchange for the right to take from their lender a "no point" home loan. (A point, which represents 1 percent of the mortgage amount, is mortgage interest paid upfront, when the loan is first made.)
Repeat refinancers have been a bonanza for the mortgage business. "In the mortgage business, there are good times and bad times," said Harvey Gruntman, Pikesville branch manager of the Sequoia Mortgage Corp., a subsidiary of Sequoia Federal Savings Bank, based in Baltimore.
"These are some of the good times."
The lowest mortgage rates in 25 years have brought in a record number of borrowers to lenders like Sequoia that are in the midst of their third wave of mortgage refinancings in less than three years.
"We've been extremely busy -- taking about 100 calls a day," Mr. Gruntman said.
The first wave of refinancings came in the winter of 1991. The second started in the summer of 1992. The third started in August, when rates dipped below 7 percent. Last week, interest rates on 30-year, fixed-rate mortgages fell to 6.81 percent, the 10th decline in 11 weeks and a new 25-year low, the Federal Home Loan Mortgage Corp. said.
Last week's average was down from 6.87 percent a week ago and just under the previous 25-year low of 6.82 percent during the week ended Sept. 9. It was the eighth consecutive week that rates averaged less than 7 percent.
Fifteen-year mortgages, an increasingly popular option for refinancers, averaged 6.36 percent last week, down from 6.39 percent a week earlier.
Closing costs are a major issue for refinancing applicants, said John Lloyd, the Lutherville branch manager for Sears Mortgage. On a refinance, closing costs typically represent about 2 percent of the new mortgage balance, or $2,000 on a $100,000 loan.
Even though some lenders continue to offer "no cost" loans, borrowers must take into account that they will have to pay a slight premium -- usually a half-percentage point -- for a loan offered on a no-cost basis, Mr. Gumbinger said.
One reason why the 2 percentage point rule is no longer relevant to many refinance customers is that mortgage balances in the 90s are bigger than in the '80s, said Mr. Lloyd of Sears Mortgage.
The bigger the mortgage, the larger the payment cut when the rate is lowered. For many people, a little number crunching reveals that there is savings to be achieved even when the mortgage rate drops by less than 2 percentage points.
Mr. Lloyd gives this hypothetical example of a typical refinance borrower who has a $100,000 mortgage and is paying 8 percent interest on a 30-year mortgage. Assuming the borrower refinances to a 30-year mortgage at 6 3/4 percent -- a drop of 1 1/4 percentage point -- she can reduce her monthly principle and interest payments on the loan by $85.16 to $648.60.
Can recoup outlays
Closing costs and fees on the loan would run about $2,500, and she could recoup her outlays in about 30 months of payments. That means that the refinance would have paid off if the borrower lives in the home beyond the 2 1/2 -year mark.
Dr. Levin, the Reisterstown internist, used a "jumbo" loan -- one for more than $350,000 -- to finance the home that his brother, an architect, designed for him. And although rates on jumbo loans are higher than conforming loans, there is still substantial savings to be had from rate reductions. (A "jumbo" mortgage is one for more than $203,150.)
The internist cut his monthly payments by $350 last year and expects to save an additional $400 a month this year through his refinance. The reductions are especially great on a large loan for a family that plans to stay indefinitely.
"I don't plan on moving," Dr. Levin jokes. "I'm going to be buried in the backyard."