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Refinancing up as mortgage rates decline

30-YEAR FIXED LOANS AT 6.55%, DOWN FROM 6.8%
By Sue McAllister
Mercury News
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Rates for 30-year mortgages this week hit their lowest point since April, and more homeowners are benefiting from the trend by refinancing their mortgages, lenders said this week.

The national average for 30-year loans dropped to 6.55 percent, down from an average 6.63 percent last week, according to a report Thursday from mortgage financing company Freddie Mac. Before this decline, which began three weeks ago, mortgage rates spent most of the summer trudging upward, reaching 6.8 percent the week of July 20.

Many Bay Area homeowners who took out first and second mortgages to buy their homes -- or who have a home equity line of credit whose rate is climbing fast -- are refinancing to a single fixed-rate loan now, said Chris Mohammed of First Horizon Home Loans in Los Gatos.

``The equity loans are adjusting, and it's freaking them out, and so they're consolidating their two loans into one loan,'' she said.

Last week's lackluster jobs report and Tuesday's decision by the Federal Reserve not to raise short-term rates resulted in the latest drop in long-term mortgage rates, said Frank Nothaft, Freddie Mac's chief economist.

The rate decreases are not significant enough to motivate many renters to become homeowners, the way super-low rates in 2004 and 2005 did. Instead, the most pronounced effect is likely to be a further increase in refinancing activity.

``People will be looking even more now to get out of the adjustable loans they're in and move into fixed-rate mortgages,'' said Bill Emerson, chief executive of Quicken Loans. ``It's just the smart thing to do.''

As home prices rose steeply in the past few years, adjustable rate loans became popular because they typically require lower initial monthly payments than fixed-rate loans. But eventually those loans adjust or ``reset'' to a higher rate, and monthly payments can suddenly increase by hundreds of dollars.

Freddie Mac estimates that $500 billion worth of first mortgages will adjust this year, along with $650 billion worth of second mortgages and home equity lines of credit. Equity lines have also been tremendously popular, allowing homeowners to borrow against the value of their homes for improvement projects, college tuition, debt repayment and the like.

Of the mortgage applications submitted last week nationwide, 38 percent were for refinances, up from 37 percent the previous week, according to the Mortgage Bankers Association. At the peak of the refi boom in 2003, as much as 80 percent of mortgage applications were for refinancing, said Mike Fratantoni, senior economist for the bankers trade group.

The group estimates that $2.4 trillion worth of mortgages will be originated nationwide in 2006, and that $915 billion of that will be refinanced loans. In 2005, mortgage activity totaled $2.9 trillion, $1.4 trillion of which was refi business.

In the second quarter of this year, 88 percent of people who refinanced their mortgages did so-called ``cash out'' refis, Freddie Mac data show. That means borrowers increased the amount of their original loan by at least 5 percent when they got their new loan.

That seems to suggest huge numbers of homeowners pulled out equity to pay for exotic vacations or new cars, said Mohammed at First Horizon Home Loans. But the figures seem less dire considering that they include most of the homeowners who refinanced two loans into one, she said.

Jim Robertson, president of the Silicon Valley chapter of the California Association of Mortgage Bankers, said about half of the new customers refinancing through his company, DBC Financial in Santa Clara, are taking out ``intermediate adjustables'' and half are getting fixed-rate loans.

Intermediate adjustables carry a fixed rate for an initial period of three, five, seven or 10 years. Thereafter, they adjust annually.

``A lot of people want to get into a 30-year fixed and they can't afford it because the payments are too high,'' Robertson said.

He added that news from England about a thwarted terrorist plot to blow up planes sent loan rates slightly lower Thursday, to 6.375 percent for a loan of less than $417,000.

``Investors look at terrorism as a threat to investing,'' he said, and tend to put their money into the more stable bond market when threats arise. As more investors run to bonds, bond yields fall, and rates for fixed-rate mortgages tend to follow suit.

``Those types of global events have much more of an impact on the mortgage market than they ever used to,'' Robertson said.

The Mortgage Bankers Association predicts that the 30-year mortgage rate will approach 6.7 percent at the end of this year and calls for rates ``basically staying level through 2007,'' Fratantoni said.

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