Sinking rates lift savings

Teresa Bowman wouldn't necessarily label herself a gambler. A "floater" might be a better description.

Bowman is just weeks from closing on a three-bedroom split-level home in Catonsville. But from the time she found the house in late October to late last week, she has seen her mortgage rate dwindle from 8 percent to 7 percent. That means her monthly principal and interest payment has dwindled as well, from $1,027 to $936.


But she wants more.

In mortgage lingo, Bowman is "floating" her rate. She's a borrower who instead of locking in an exact interest rate at a specific time, takes the gamble that mortgages will "float" down to a more favorable rate before it's time to go to settlement.


"When I first talked [with the mortgage company] they were up there almost 7.75, 8 percent, and then [last] week they dropped, and I'm just kind of hanging on, seeing if maybe they will drop a little bit more, and then I'll lock in at the lowest rate that I can," said Bowman, fitness and aerobics director for Merritt Athletic Club near Security Square Mall.

Mortgage rates have decreased since May, when 30-year, fixed-rate mortgages were flirting with 9 percent. Since then, almost 2 points have been shaved off the rate, delighting numerous borrowers and igniting another wave of refinancing by homeowners.

According to the latest Freddie Mac weekly national survey, the average 30-year, fixed-rate mortgage has dropped to 6.89 percent, the lowest since April 23, 1999, when it was 6.88 percent. A year ago, the Freddie Mac 30-year, fixed-rate mortgage was at 8.18 percent.

As for the Baltimore market, the 30-year, fixed-rate mortgage fell Friday to 7.16 percent. The last time it was that low was May 21, 1999, when it hit 7.11 percent. But as recently as May, the rate had climbed to 8.68 percent. On a $150,000 loan, the monthly difference in principal and interest between a rate of 7.16 percent and 8.68 percent is $158.

The Federal Reserve Board's surprise move this month to lower short-term rates by a half percentage point didn't have an impact on the mortgage markets. Most lenders had anticipated the cut and had reflected it into their mortgage products, hence the lower rates long before the Fed's rate cut. Some lenders saw their rates bump up slightly as money flowed from the bond market - which guides mortgage rates - back into the stock market.

Free advertising

"When you have every front page of every newspaper in the country with the lead article being the Fed drops the discount rate a half percent, that probably is the best form of advertising that we could have," said Theodore E. "Chip" Reichhart Jr., president of First Horizon Home Loans, MNC Division.

"The public perception is that all interest rates are coming down, [but] it generates the activity that maybe it is something that [consumers] should look at," he said.


And with another Fed meeting at the end of the month, will the market begin to anticipate another cut and begin building it into their rates, or have consumers seen the bottom of the barrel?

"If and when the Fed does actually make the move, I think mortgage rates will go down, but not nearly as much as the Fed change," said Robert Van Order, chief economist at Freddie Mac. "What I mean by that is that if the Fed over the next couple of months overall would make a [half-point] move down, I don't think mortgage rates would go down [that much]. They would go down more like [a tenth] or something. Most of it has been built in."

David Berson, an economist at Fannie Mae, issued an economic report that speculated that if the Fed aggressively cuts rates and the economy does not respond, "then mortgage rates could drop to 6.5 percent or below - and lead to a record round of refinancings and a new high in mortgage originations."

But if that scenario plays out, "it would not be a happy world," said Van Order. "It would probably mean a recession."

Few industry people are predicting a recession, but they are comfortable with saying that mortgage rates for the next several months should stay at about 7 percent.

"Actually there is a little bit of opportunity for rates to decline a little bit yet," said Keith Gumbinger, a vice president at HSH Associates. "But the more that the Fed cuts interest rates, the greater the likelihood that the economy will begin to revive.


"That's not to say we could see a dip, a short-term decline. But the market in the last several weeks has especially counted on increasingly bad news. If the news isn't that bad, or even starts to show signs of improvement, mortgage interest rates could rise."

Lowest rates since early '99

Yet with mortgage rates at their lowest point since spring 1999, could another surge in the housing market be on the horizon?

"With declining interest rates, you do drag a few more people into the marketplace," Gumbinger said. "But when you are talking about a purchase, there is a whole combination of factors, the planets almost have to align in some way.

"You have to have a job. A lot of people have seen those layoff notices go out, especially if you are one of those dot-com folks. You have to have confidence about the future ... a couple of bucks saved away [for down payment and settlement] and you have to have homes that you can afford to buy in your marketplace," Gumbinger said, adding that the decline in the stock market has also taken away some wealth that was going into housing.

"It proves that interest rates alone probably aren't enough today to get the market kicked up again."


In fact, most lenders are gearing up for the next wave of refinancing.

"We have seen quite an increase already this year. It has certainly picked up," said Reichhart of First Horizon.

According to the Mortgage Bankers Association of America, 54.6 percent of all loan applications taken last week were for refinancing.

"The phone is ringing off the hook with refinance business," said Neil Sweren, president of AllyMac Mortgage in Owings Mills.

"People still have adjustable rates on FHA and conventional programs, and it's a great opportunity for them to refinance and get into a reasonable fixed rate. If their adjustable rate is going to go up over 7 or 7.25 percent, it's time to think about refinancing."

Bill Heffernan of First Home Mortgage and president of the Maryland Mortgage Bankers Association, also said his Lutherville office has seen an uptick in activity.


"We do have a lot of people calling in right now with regard to refinancing," Heffernan said. "I've talked to appraisers, and they are much busier than they were 30 days ago, but it is more refinance than purchase."

To refinance a mortgage, where no discount or origination points are charged, borrowers should expect to pay between $1,500 and $2,000 in settlement costs. A point is equal to 1 percent of the loan amount being financed. But in most cases, the cost of doing a refinance is built into the new loan amount, and many times a homeowner can recoup the money with the savings made with the lower monthly payment.

"I tell people [to consider refinancing] when it is at least a half-percent difference," Heffernan said. "But it really depends on the loan amount. A half percent, if it is a $200,000 mortgage, can make a huge difference. Anyone that is probably above 8 percent, they should be checking in."

For example, a homeowner who last spring took out a $200,000 loan at 8.25 percent is paying $1,502 a month in principal and interest. Refinance the loan at 7 percent and the monthly payment drops to $1,331, a difference of $171 a month. The interest savings over the 30-year life of the loan amounts to $61,894. And it takes only 12 months to approximately recoup the cost of the refinance.

'Cash-out refinance'

Though the last refinancing wave was just two years ago, a lot has happened in terms of home value appreciation, allowing those who have a mortgage of less than 7 percent to perhaps do what is called a "cash-out refinance."


Reichhart said most of his company's loan portfolio is made up of loans that are below 8 percent, but those people have recouped their prior refinance cost and "these people may be in the position to do some upgrading [to their home]" or pay off debt.

"If they have accumulated any other debt or have a home equity line at a higher interest rate, they may go from a 6.75 to 7 percent [first mortgage], but they may eliminate a 10.5 or 11 percent home equity line or second mortgage or car loan," Reichhart said.

"In that case, it would be an excellent opportunity even if they went up a little bit in the rate on the first mortgage to eliminate some other debt because of the improvement in equity," he said.

Sweren gave the example of a homeowner who in 1998 may have bought a home for $200,000 with a $160,000 mortgage at 6.75 percent. The monthly principal and interest comes to $1,037.

With surging appreciation over the last two years, Sweren said that the home, if it's in a hot area, could possibly be worth $250,000.

Now the homeowner, maintaining 20 percent equity, would be eligible to take out a mortgage of $200,000. At 7 percent, the monthly principal and interest payment would rise to $1,330, but at the settlement table the homeowner would walk away with $40,000 after paying off the first mortgage.


That money could be used for home improvements, paying off high-interest credit cards or purchasing a car.

Sweren further explained that refinancing in this manner makes more dollars and sense than to keep the original 6.75 percent mortgage and then open up a home equity line of credit, where interest rates are usually tied to the prime rate.

In that scenario, the monthly payment - based on a 9.5 percent interest rate - for a $40,000 home equity line would be $336 a month. Add that to $1,037 for the first mortgage and the monthly mortgage totals come to $1,373, $43 more a month than if the homeowner would have chosen the higher 7 percent refinance.

Watch for rate schemes

Lenders warn consumers who are looking for a new mortgage - whether it be for a purchase or a refinance - to be wary of offers that seem too good to be true.

"If anyone says that [rates] are definitely going to go down, then I would be personally leery of them," Heffernan said.


"That is like a stockbroker saying, 'You are definitely going to make money on this stock.' We are in a commodity game. Depending on the market, it goes up and down," he said.

"Deal with people you know. Are you dealing with a reputable company? Are you dealing with a member of an association - the Maryland Mortgage Bankers Association, the Maryland Mortgage Brokers Association. Deal with people they trust. Deal with people recognized as leaders in the industry.

"Unfortunately, like a lot of businesses, there are sharks out there."