Low mortgage rates spur refinancing boom
Associated Press
WASHINGTON — Americans are taking advantage of lower mortgage rates and refinancing their homes in droves — a boom that is likely to make 2001 the second-biggest year ever for refinancing.
While this week's move by the Fed to cut interest rates won't readily translate into still lower mortgage rates, rates are down more than a percentage point from a year ago, making it attractive for many homeowners to redo loans.
By refinancing, people swap higher-interest debt for lower-interest debt, allowing them to trim monthly payments.
Some take out a bigger loan, using it to consolidate household debt or pay for home improvements.
"Refinancing has really shot up dramatically because there are quite a few mortgages with interest rates of 7 percent or higher. Business is so good that we are hiring people," said Sung Won Sohn, chief economist at Wells Fargo, a major provider of residential mortgages.
For the week ending May 11, the average rate on a 30-year fixed-rate mortgage was 7.10 percent, according to Freddie Mac, the mortgage corporation. A year ago, the 30-year rate averaged 8.52 percent and hit a five-year high of 8.64 percent one week later.
A person with a 30-year mortgage at 8.5 percent would pay $769 a month on a $100,000 loan. At 7 percent, the person would pay $665 a month for a $100,000 loan, according to figures supplied by the National Association of Realtors. Thus, a person who took out a mortgage near the peak level last year would save $104 a month by refinancing at current rates.
Mortgage rates began their descent last fall and showed some big declines earlier in the year. The average interest rate on a 30-year mortgage, for instance, fell below the 7 percent mark six different weeks this year. Fifteen-year fixed rate mortgages and one-year adjustable rate mortgages have been below 7 percent all year long.
Freddie Mac says 15-year mortgages, a popular option for refinancing, averaged 6.61 percent last week, compared with 8.17 percent for the same week last year. One-year adjustable rate mortgages averaged 5.90 percent last week, down from 6.96 percent a year ago.
The Freddie Mac rates do not include add-on fees know as points, which averaged around 1 percent of the loan amount for all three type of mortgages.
"It's been quite a wave of refinancing. But I think we may have seen the crest," said Stuart Hoffman, chief economist at PNC Financial Services Group. "That's because I don't think there will be any really big tumbles in rates."
Given that, experts believe refinancing activity may slow in the months ahead but still remain brisk.
Even factoring that in, mortgage refinancing activity is expected to total more than $600 billion this year, second only to the 1998 mark of $750 billion, says Doug Duncan, chief economist for the Mortgage Bankers Association of America. Last year, just under $200 billion worth of mortgages were refinanced.
So when should a person even considering refinancing?
Experts say a rough rule of thumb is that your new interest rate should be 1 percentage point lower than your current one, if you also want to recover any upfront costs.
