Like many California homeowners, Denise Lodato is worried about her adjustable-rate mortgage. Because her monthly payments are being kept artificially low, her loan principal is rising by $200 a month. Uncomfortable with that, the 31-year-old Cypress homeowner has applied to refinance her mortgage into a fixed-rate loan.
"It's driving me crazy," she says of the increase in her loan principal through a process known as negative amortization in industry parlance. "It just bothers me every month that it's going up, plus I'd like to know what my payment is going to be every month."
Spurred by the fact that fixed-rate home loans are starting to drop below 10% and worried about rising rates on adjustable loans, homeowners like Lodato in California and nationwide are initiating a new round of mortgage refinancings.
Although no industrywide figures are available, some California mortgage brokers report refinancing applications rising as much as 50% from levels earlier in the year.
While similar large increases are not being reported by enough other lenders to make this a refinancing boom equal to that of 1986 and early 1987, volume nonetheless is expected to increase dramatically if average mortgage rates drop to around 9.5%, lenders predicted Thursday.
The refinancing movement reflects a growing consumer preference for fixed-rate loans, reversing the trend of a few months ago favoring adjustable-rate mortgages. Some lenders are encouraging refinancings by cutting fees or simplifying the application process.
However, the refinancing movement could hurt the profits of savings and loan firms that have relied heavily on adjustable-rate loans, possibly exacerbating the industry's already wobbly financial condition, some industry experts say.
Demand for refinancings is expected to be particularly strong among homeowners eager to ditch adjustable-rate loans they may have taken out within the last two years. Those loans usually started at initial "teaser" rates of 9% or less but have been adjusted upward to 11% or higher now--even as general interest rates in the economy are falling.
ARM borrowers like Lodato also may seek to refinance simply to get out of loans with negative amortization. Some are simply tired of seeing their monthly payments gyrate.
These borrowers are not refinancing into new adjustable-rate loans, because below-market teaser rates are no longer as prevalent. Also, the difference in rates between new fixed and adjustable loans has narrowed.
"From the new applications coming in, it looks like people are refinancing to fixed loans from the old monthly adjustable-rate mortgages," said Sigmund Anderman, chairman and chief executive of CompuFund Inc., a Pleasanton mortgage network firm that reports refinancing volume up about 40% from earlier this year.
"They feel more secure with fixed instead of adjustables," said Gary Prince, president of Tower Mortgage Corp., a Cypress firm that has seen its refinancing volume rise 50% to 70% over last year.
Refinancing demand is also expected to grow among borrowers who took out fixed-rate loans last year at rates as high as 11.5%.
Average rates for 30-year fixed-rate loans in California have fallen to 10.59%, down from 10.80% last week, reports Paul S. Havemann, vice president of HSH Associates, a mortgage information publisher in Butler, N.J. That compares with 9.46% initial rates for California ARMs.
But some California lenders are offering 30-year fixed-rate loans below 10%, albeit with higher up-front fees called points. (One point equals 1% of the loan amount. The more points a borrower is willing to pay, the lower the rate he can get.)
Fixed Rates Below 10%
According to Havemann, Commonwealth Mortgage in Sacramento is quoting a 30-year fixed rate of 9.875% with fees of only 1 point. All Valley Mortgage in Fresno is quoting 9.625% with 3.5 points, while GMAC Mortgage Corp. offices in Pleasanton and San Diego are offering 9.75% at 2.5 points, Havemann said.
All told, more than 100 lenders nationwide are offering 30-year fixed-rate loans at less than 10% interest, with fees of less than 3 points, Havemann said.
Mortgage bankers and other lenders are encouraging refinancings by offering special deals, such as reducing or eliminating closing costs and other fees, in exchange for charging above-market interest rates.
For example, Countrywide Funding Corp., a mortgage banking firm based in Pasadena, is offering a 30-year fixed rate loan at about 10.75% and will absorb all fees, appraisal costs, title fees or other charges. Borrowers with current fixed-rate loans at 11.5% or higher could find such no-fee loans attractive, since it will cost them nothing to switch, said Angelo R. Mozilo, president and chief executive of Countrywide Funding.
They Remember Last Boom
Countrywide also is offering $250 discounts on refinancing fees on other loans, for customers with loans serviced by the firm.