By E. Scott Reckard, Los Angeles Times
May 28, 2010
The debt crisis in Europe that has unhinged global stock markets also has helped push U.S. mortgage rates back toward record lows, prompting a surge in refinancing.
Freddie Mac reported Thursday that the average rate offered on 30-year fixed-rate home loans sank to 4.78% this week, down from 4.84% last week and not far from the record low of 4.71% set late last year.
The rates are tracking a drop in yields on 10-year Treasury bonds, which have been pushed down by investors buying them up as a haven from the troubles in Europe.
Last year, experts anticipated that loan rates would be rising by now, as federal housing and home-loan support programs expired, home prices stabilized and inflation became more of a concern. Then the default scare emerged over Greece and other debt-burden European countries.
“Just when we thought we were finally experiencing [higher loan rates], we got the PIGS,” said Stew Larsen, head of mortgage operations for Bank of the West, using an acronym for Portugal, Italy, Greece and Spain.
U.S. homeowners are applying to refinance their loans at the fastest pace in seven months, the Mortgage Bankers Assn. said this week.
Although powerful, the surge doesn’t compare with the tidal wave of refinancing early last year after the Federal Reserve, battling the fierce recession, lowered its benchmark interest rate to near zero. But there are still plenty of homeowners with higher-rate loans who have never refinanced despite several opportunities since then.
“Many of our customers now feel they missed a couple of other windows,” Larsen said.
Personal-finance experts say homeowners should think carefully before refinancing, since upfront costs can be high and new mortgages extend the period of indebtedness unless borrowers substitute a shorter-term loan. But the savings can be considerable: A monthly payment of principal and interest on a $350,000 loan at 6.25% is $2,155; at 4.75% the payment is $1,826, saving nearly $4,000 a year.
Not everyone is lucky enough to have such opportunities. Given the collapse in home prices, most borrowers who bought homes during the housing boom have little or no equity left, so they can’t refinance — a problem compounded by far tighter lending standards these days.
“Most lenders are requiring larger down payments [or] more equity than when the loan was originally made,” said Tom Kelly, a spokesman for JPMorgan Chase & Co.
But for people who still have equity, good jobs and solid credit ratings, the repeated opportunities over the last year to lock in long-term rates under 5% are something not seen since the 1950s.
In contrast to the latest refinance boom, applications to buy homes plunged this month. Buyers had rushed to complete their transactions by the end of April, when federal tax credits for home buying expired. The refinance share of mortgage activity was at 72% of total applications, the Mortgage Bankers Assn. reported this week, the highest level since December 2009.
Dean Cherry, a fire captain, and his wife, Theresa, a mortgage company executive, bought a home in San Diego in 1993. Avid water skiers, they later took out a home-equity credit line to buy land where they are installing a prefabricated vacation home in a private development that has three lakes set up for water skiing competitions.
Although the interest rate on the credit line was low, it also was variable. To eliminate the risk of it surging when rates move higher, they combined their first mortgage and the credit line this year into a single $388,000, 15-year loan. The rate was 4.5%.
“It was about getting me into something I could be sure about for the next 15 years,” Theresa Cherry said. “I was always worried about where the home-equity loan would go.”
Her boss, Guild Mortgage Co. Executive Vice President Steve Hops, said he, like most people in his industry, had believed rates would go back up beginning in April.
That was when the Federal Reserve ended its housing-support program to buy $1.25 trillion in bonds issued by Freddie Mac and other government-sponsored mortgage enterprises.
“Who would have forecast that after the Fed stopped buying mortgage-backed securities the rates would come back down into the 4s?” Hops said.