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Homeowners Catching Refinancing Fever as Interest Rates Fall

February 2, 1996

NEW YORK (AP) _ Falling interest rates are once again giving America’s homeowners refinancing fever, according to reports from lenders Thursday.

Though far from the stampede of activity in 1993, many mortgage bankers say they’ve seen an increase in business in recent weeks from individuals looking to take advantage of lower borrowing costs to slash monthly expenses.

``We’re in the middle of a refinancing boon; there’s no doubt about it,″ said David A. Lereah, chief economist for the Mortgage Bankers Association of America in Washington.

At the end of last week, refinancings accounted for 51.5 percent of all conventional home loan originations, up from 44 percent at the end of 1995 and compared with only 9.68 percent the same week a year ago, according to the Mortgage Bankers Association.

During its peak in October 1993, refinancings comprised nearly three quarters of the mortgage market, the industry group said.

So why all the fuss? ``There can be significant savings. It depends, of course, on the length of your stay in your home and whether you want to pay more money up front or not,″ said Lereah.

Someone with a $100,000 mortgage carrying an 8.25 percent rate for 30 years would save $86 a month by refinancing at a 7 percent rate. The savings would total $780 after a year, and $2,340 after three years, he said.

However, it often costs homeowners between $2,500 and $3,500 in closing costs, noted Ronnie J. Wynn, president of Colonial Mortgage Co. in Montgomery, Ala., where refinancings now make up 60 percent of business.

And even those who want to refinance can run into obstacles, such as the collapse of housing prices in California and the Northeast.

Charles and Joey Seward paid $465,000 for a house in Claremont, Calif., five years ago. They had sold another home at the time, just as California’s housing boom peaked, and were able to make a downpayment of about 25 percent.

They now have an adjustable rate loan on which the interest rate is about 8 1/2 percent, and were hoping to refinance it to a fixed-rate loan somewhere near 7 percent.

The problem is whether they have enough equity in the home so a lender will write them a new mortgage. While prices have held up relatively well in their established neighborhood, they know that prices in many expensive areas of Los Angeles County are down as much as 35 percent from their peaks.

``Here we have an adjustable and we’re paying more than people with a fixed,″ Charles Seward said. ``But the big step is getting it appraised for enough money and that’s going to be a problem.″

Not surprisingly, the recent rise in activity coincides with the ongoing trend toward lower interest rates.

Long-term rates have fallen sharply amid growing concerns in the public bond markets about slower economic growth.

The 30-year mortgage has dipped below the psychologically important 7 percent rate on several occasions in recent weeks, after climbing above 9 percent only a year ago. (Several banks still offer rates below 7 percent, though borrowers must pay higher ``points,″ or fees to get a lower rate.)

Federal Reserve policy makers also have trimmed short-term rates three times since July to help jump-start the economy.

The latest Fed action on Wednesday amounted to a quarter-percentage point cut in the federal fund rate, the rate banks charge each other for overnight loans, and the discount rate, the rate at which banks borrow from regional Fed banks. They now stand at 5.25 percent and 5 percent, respectively.

In response, most major banks also lowered their prime lending rates to 8.25 percent from 8.5 percent.

While the Fed and bank actions won’t directly impact most long-term mortgage rates, most economists expect home borrowing costs to continue to move lower in the near future, and therefore, spark more interest in refinancings.

``As long as the economy continues to weaken _ and we’re looking for only 1.9 percent growth in this quarter _ we’re going to see more easing,″ said Lereah.

He said the rate on the 30-year fixed conventional mortgage could fall well below 7 percent in the next few months. Rates reached a 25-year low of around 6.75 in October 1993.

As of Thursday, the average rate on a 30-year mortgage was 7.02 percent, according to a national survey released by the Federal Home Loan Mortgage Corp. The rate averaged 6.52 percent for a 15-year mortgage and 5.37 percent for a one-year adjustable rate mortgage, Freddie Mac said.

Keith T. Gumbinger, vice president of HSH Associates, a mortgage research firm in Butler, N.J., says three kinds of mortgage holders are likely to benefit from refinancing at a lower rate: those in the second or third years of an adjustable rate mortgage; those who want to reconsolidate their debts; and those who did not or could not refinance during 1993.

Some of the so-called ``stragglers,″ Gumbinger said, experienced a loss of equity in their homes in the early 1990′s when housing prices dropped. Others lost their jobs and needed to show at least two years of steady employment to qualify for an attractive new loan, he said.

The most popular loan in refinancing is the fixed-rate mortgage, particularly the 30-year, lenders say.

In fact, fixed rate mortgages accounted for 74 percent of all conventional mortgage lending by the end of 1995, with adjustable rate mortgages comprising the remaining 26 percent, according to the Federal Housing Finance Board.

By the end of 1994, fixed-rate loans held only a 45 percent market share, vs. a 76 percent share in 1993, according to the board.