When Todd Dean and his wife bought their La Habra Heights home in 1982, mortgage rates were sky high. To buy the home, the couple took one loan at a 13.5% fixed rate and a second at 16.5%.
Last year, when interest rates began tumbling, they refinanced both loans at a 12% fixed rate. They were satisfied--at least for a few months.
Now, with a chance to refinance again, this time at 9.875%, the Deans are jumping at it.
"Saving $300 a month is pretty nice," Dean, a 31-year-old pet-supplies salesman, said of the estimated drop in his monthly payment. "If mortgage rates go down another two points in the next four or five months, I'll consider refinancing again."
Cashing in on the first single-digit fixed-rate mortgages available in nearly eight years, homeowners nationwide are flocking to refinance existing mortgages. Many savings and loan associations, mortgage bankers and other lenders report record volume in refinancing applications, with phones at some institutions ringing off the hook while employees work six-day weeks to handle the surge.
"Everybody's thinking about doing it," said Jack Grigsby, chairman and president of the residential mortgage arm of Coldwell Banker, a Los Angeles-based real estate brokerage firm.
"It's a massive psychological breakthrough in consumers' perceptions, seeing single-digit rates for the first time in seven or eight years," said Robert K. Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter.
The refinancing boom comes also as lower rates are boosting new home sales, which in January hit their highest levels in more than two years.
The billions of dollars that consumers will eventually save will boost the economy through higher retail sales, investments and purchases of other homes, experts say. Some consumers report lowering their monthly payments by as much as $500. Others use refinancings to shorten loan maturities, switch from adjustable-rate loans to fixed-rate loans, finance remodeling projects or borrow for other investments ranging from stocks to prize horses.
Consumers should expect to save even more soon, experts say, as intense competition for refinancing business prompts lenders to cut fees or offer other incentives. Several California S&Ls have cut origination fees to 1.5 points, or 1.5% of the loan's value, from two points; at least one charges no points at all on certain loans. The industry average has been about 2.5 points.
12% Used as Bench Mark
Experts say homeowners with mortgages above 12% generally are benefiting if they refinance now.
"At these current rates, refinancing is very attractive to anybody who borrowed money in the last five years," said Sigmund Anderman, president of CompuFund, a computerized mortgage-search firm in Santa Ana that has seen its volume more than double since November.
"It's a no-lose situation," said Gayle Sherry, a housewife in Hudson, Ohio, south of Cleveland.
She and her husband used their refinancing not only to lower their monthly payment by $150, but also to borrow an additional $11,000, which they invested in an Arabian horse. The refinancing also allowed them to switch from an adjustable-rate mortgage at 13.25% to a fixed-rate mortgage at 10.75%.
The lower rates are particularly a godsend for borrowers in danger of defaulting on loans taken out three or four years ago when rates were as high as 17%. Lenders are encouraging these troubled borrowers to refinance rather than default.
"Paying $200 or $300 less in monthly payments really makes a difference for many people," said Rebecca Marek, head of mortgage banking at First City National Bank in Houston, where the oil-industry slump has forced many homeowners to default.
Wary of Repeating History
But the trend is not necessarily good news for lenders. While fees from writing new mortgages could boost S&L profits this year to record highs, some experts worry that a return to low, fixed-rate lending may eventually lead to a repetition of some of the woes that caused a fourth of the nation's S&Ls to collapse or merge in 1981-82. Rising interest rates then forced many S&Ls to pay more in interest for deposits than they were earning in interest on loans.
"If we originate a lot of fixed-rate loans at low interest rates, then similar types of problems could crop up again," said Warren Raybould, senior vice president for residential lending at California Federal Savings & Loan in Los Angeles.
To reduce the risk, many S&Ls, particularly in California, cut or eliminated fixed-rate lending during the last few years. Instead, they promoted adjustable-rate loans, which were popular in the early 1980s when interest rates were high.