KOVALESKI: Why Re-fi? Loan rates hit 37-year low

A potent post-holiday pick-me-up for consumers is the chance to put a bit more money in their pockets. After a year of declining home value and other less-than-jolly events in the real estate market, some ho-ho-hope might be found in the mortgage refinancing market.

Mortgage loan rates declined to a 37-year low the last week of December, according to the Freddie Mac Primary Mortgage Market Survey. (Freddie Mac began surveying lenders in 1971.) Federal Reserve actions are putting downward pressures on rates, according to Keith Gumbinger of HSH Associates, a publisher of mortgage information that releases its own market survey.

Federal Reserve Chairman Ben Bernanke announced in November 2007 that the agency would buy $500 billion worth of long-term securities to drive down yields on long-term Treasury bonds. Mortgage rates began falling in response to the Fed’s moves.

While the interest-rate declines aren’t causing a spike in loans for home buyers, they are fueling a spate of refinancing. The Mortgage Bankers Association reports that more than four of every five recent mortgage applications were to refinance existing loans.
As rates begin to edge toward — even below — 5.0 percent for 30- and 15-year fixed rates, they may become a psychological tripwire that sends borrowers looking for better deals.

Consumers mindful of the potential savings should, however, temper their enthusiasm as they contemplate and complete applications. While the historic lows could be a financial bonanza for some, they may be unattainable for others. For instance, approval rates for refinanced loans might be lower than in the past since reduced home values in many parts of Florida considerably may have trimmed homeowners’ equity.  Additionally, consumers may possess lower credit ratings than when they initially secured their mortgages.

Further, the rate slide won’t help those who owe more than their homes are worth. For those who have purchased within the last two years – especially with little or no money down – there will be no benefit, as those consumers will have little or no equity.
What should consumers consider as mortgage rates retreat? Here are some tips:

•EXAMINE CLOSING COSTS: Obtain a good faith estimate from your potential lender and understand how much the refinanced loan will cost. Lenders levy standard charges, whether for a refinanced loan or a new home purchase. Typically, closing costs are in the range of 2.5 percent of the new loan amount but sometimes less, depending on the rate you accept. Talk to your lender. Knowing this cost helps determine whether refinancing is a viable option. Some lenders will waive closing costs in exchange for providing a higher loan rate or rolling the costs into the loan. Evaluate these options against your own financial standing. One rule of thumb is that it should take you no more than three years to break even on your closing costs.

•HOW SOON WILL YOU MOVE? The answer to this question helps you understand whether you’ll recoup the closing costs. Generally, unless you remain in your home for at least three to five years, recapturing closing costs may be difficult.

•KNOW YOUR CREDIT SCORE: Lenders will make loans for refinancing but only for well-qualified buyers with good credit. Pull your credit report so that you know your score and can correct inaccuracies before you begin to shop. While you’re obtaining your credit score, also pull other paperwork you’ll likely be asked for, including pay stubs and income tax forms.

•PACK SOME PATIENCE: Many consumers are seizing the moment, which could lead to a backlog. The mortgage industry has had thousands of layoffs in the past two years. Consequently, approvals and closings may happen more slowly than before.

• SHOP AROUND: You may not qualify for the lowest rate advertised – or may not want the terms that come with it. Teaser rates often are for those with the highest credit ratings or they come with the most fees. Find the best rates for which you qualify and shop at least three different lenders. Be sure to ask about the interest rate, the annual percentage rate (APR) and a good faith estimate of all fees and points assessed at closing.

Charles J. Kovaleski is president of Attorneys’ Title Insurance Fund, Inc., (The Fund) the leading title insurer in Florida and the sixth largest title insurance company in the country. Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years and supports a network of more than 6,000 attorney agents statewide who practice real estate law.