It didn't take long for Robert Van Order to switch strategies.
Year after year the chief economist for Freddie Mac would refinance a one-year adjustable-rate mortgage on his home in an effort to keep his monthly payments as low as possible.
But a funny thing happened this year. Rates for a 30-year, fixed-rate mortgage kept dropping and dropping and dropping and before long they began to catch up to those "low" adjustable rates.
"I'm getting out of the ARM," Van Order said last week. "I'm going to do a 30-year fixed I've been doing teaser rates for the last few years and refinancing every year but why not."
From the chief economist for the mega-supplier of money for the mortgage industry to first-time homebuyers, those seeking to purchase or refinance a home are enjoying the lowest mortgage rates since Lyndon BainesJohnson sat in the White House.
Chaos in the world's financial markets has caused funds to pour into U.S. Treasury bonds, forcing yields lower. Coupled with the recent Federal Reserve Board's rate cut, which has pushed mortgage rates that were hovering around 7 percent just a couple of months ago down to 6.5 percent.
Interest rates for a 30-year, fixed-rate mortgage fell to 6.49 percent from the prior week's 6.60, according to Friday's Freddie Mac Primary Mortgage Market Survey. That's the lowest since January 1968. Rates for a 15-year mortgage dropped to 6.15 percent.
In contrast, a one-year adjustable-rate mortgage stood at 5.36 percent.
And in the Baltimore metropolitan area, the average 30-year rate dropped to 6.47 -- a 30-year low -- according to HSH Associates, a New Jersey firm that tracks and analyzes mortgage rates.
The Mortgage Bankers Association of America also reported that mortgage applications last week -- when compared to the same week in 1997 -- were up 153.3 percent. In addition, the MBA said, refinancing accounted for 65.5 percent of all applications taken last week compared with 20 percent to 25 percent when rates remain relatively steady for a 12-month period.
Conversely, the percentage of applications for adjustable-rate mortgages continued to shrink, making up only 6.1 percent of the mortgage origination activity.
But have mortgage interest rates hit bottom?
"I think we are bouncing along the bottom. I think it is reasonable to say that," said Keith Gumbinger, vice president of HSH Associates. "There still may be a little downward space yet," he said, but added that HSH expects rates to tick upward in coming months as "economies overseas do what they can to get their economies stimulated."
But Brian Carey, an economist for the MBA, had a differing view.
"We have been reshaping and going over our forecast the last couple of days and have not finalized it," he said. "But I would say we expect rates to probably really hit their lows in the first quarter of 1999, based on our expectations of further Fed rate cuts. We expect at least one by the first quarter of 1999."
Whether rates continue to sink or not, the slide is having a profound effect on the housing and mortgage industry:
* The National Association of Realtors is predicting 4.7 million existing homes will be sold this year, compared with last year's record 4.21 million.
* The MBA is expecting total mortgage dollar volume to reach $1.4 trillion this year, smashing the previous mark of $1.02 trillion set during the refinancing boom of 1993.
* The MBA's Refinance Index -- which tracks the refinance activity of the nation's top 30 lenders -- is already at an all-time high. And homeowners who refinanced 8 percent mortgages last winter to a 7.25 or 7 percent rate, are finding themselves calling lenders again to realize even more savings.
* Adjustable-rate mortgages, invented when rates in the early 1980s hit close to 20 percent, will be used in only the most extreme circumstances.
A homebuyer who selects a one-year adjustable rate mortgage at 5.36 percent with a 2 percent cap will see an adjustment -- when adding in the loan's margin of 2.75 percent -- to a rate of 7.36 percent on its anniversary. Nowadays, that simply doesn't make financial sense.
"I haven't done an ARM in a couple of years. The ARM is dead. The ARM is gone," said Brian Sacks of Allied Bankshares Mortgage in Lutherville. "The spread in the marketplace is such that even the 5- and 7-year [adjustable rate] products are comparable to the 30-year fixed."
"Everybody is jettisoning the ARM," said Tom Champion, manager of the Lutherville office of Norwest Mortgage.
The rush of homeowners who are dumping ARMS for fixed-rate mortgages combined with the sizzling purchase market has loan officers scrambling.
"We are extremely busy. The volume of phone calls has probably tripled," Sacks said, adding, "It is what every mortgage banker prays for, a year like 1998. I've been doing this for 14 years, and this is the year I've prayed for.
"But what is really nice about this year is that we are not only seeing people who are refinancing, we have some folks who are refinancing two or three times over the last couple of years," Sacks added.
The reason people are doing multiple refinances is that the cost of the transaction is relatively low. According to Champion, the cost of a zero-point refinance -- excluding prepaid items and escrows -- in Maryland should be approximately $1,500.
For refinancing to make financial sense, consumers should look to recoup those costs within a maximum of 15 months.
"We're having such a big refinancing boom going on right now that I would guess that some people at 7.25 or 7.5 from earlier in the year are indeed refinancing," said Van Order. "If you refinanced in the spring, then it is pretty easy to refinance again right now."
Take Larry and Tamara Bensky. The couple, who bought a home in Owings Mills a little more than two years ago, are ready to refinance for the third time.
And, thanks to a strategy they follow, they won't pay any refinancing costs out of pocket or even roll them into the new mortgage.
Simply, the Benskys don't ask for the lowest mortgage rate. Instead they "buy up" the rate and in turn the mortgage company gives the couple a credit that pays the cost of the transaction. The result is that they still get a lower rate, a lower mortgage payment and don't pay anything for the refinancing.
The first time the Benskys refinanced their 8 5/8 percent mortgage, they bought the rate up from 7 3/4 to 7 7/8 . As rates dropped to the 7 percent range earlier this year, they did it again, buying up the rate from 7 1/8 to 7 3/8 . And now they are looking to do it again, taking the rate from 6 5/8 to 6 3/4 .
"I'm not lowering [the rate] as much as I could. [But] I won't pay money out of my pocket," Larry Bensky said.
"And a lot of times people will tack [the refinance cost] on the back of their mortgage. I won't do that either."
And as more people jam the refinance pipeline, both Champion and Sacks had words of advice.
Said Champion: "I just believe the consumer has to have some patience at this point in time, and not try and get the lowest rate possible, because they will never be able to time the market unless it is by sheer luck. They should find a rate that works for them and creates payment savings."
Added Sacks: "This is a service business. Rates are important, but getting the job done with the least amount of aggravation is equally important. If you get a good rate, and you can't go to settlement because of someone's negligence or incompetence, you can't save anything."
The power of refinancing
If a homeowner refinanced a $150,000 mortgage to a 7.5 percent rate in January, the monthly principal and interest payment would be $1,048.82. The total interest over a 30-year loan would be $227,575.
By refinancing again to a new $150,000 mortgage with a 6.5 percent interest rate in October, the homeowner's monthly principal and interest would drop to $948.10 -- a savings of $100.72. And over the life of the 30-year term the total interest saved would amount to $36,259.
And if the homeowner decided to apply that $100 savings to the principal every month, the total interest saved would come to an additional $51,723 and the mortgage would be paid off in 23 years.
Overall, by maintaining the original $1,048.82 principal and interest payment, the homeowner would save almost $88,000 during the 23 years of the term.
Or, if the homeowner chose to invest that $100 savings in a financial product with a 10 percent annual return, after 23 years the homeowner would see a gain of $106,555.
SOURCE: HSH Associates
Pub Date: 10/11/98