- The Washington Times - Friday, November 22, 2002

If you own a home, chances are good you have thought about refinancing your mortgage lately. Rates recently fell to a 40-year low and have been hovering at record low levels. This has brought out a flood of homeowners who want to lower their monthly payments, get a mortgage with a shorter term or take money out of their properties for home improvements and consumer purchases.

"This market is the craziest I've ever seen it," says Patrick Maloney, a division manager with B.F. Saul Mortgage. "You have title companies and appraisers who are saying, 'No more, I can't take any more business.' Many people are waiting 45 days or more to close on their refinance because the system is so backlogged."

Even though rates have been low for several years, they continue to establish records for low rates. In addition, home values have shot up dramatically in the past two years. These factors have caused some homeowners to refinance repeatedly, each time trying to get a lower rate or to take more money out.

"We refinanced some people six months ago, and now they're in our office to do it again," says Jules Clifford, a vice president at HomeFirst Mortgage Corp. "And it makes sense for them to do it, because refinancing is not a guessing game. It's very black and white. You look at the quote and say: 'So, it will cost me blank dollars to refinance, and I will recoup that in blank months.' Either it's cost-effective or it's not."

The hordes of people trying to refinance these days are straining the other industries involved in mortgage transactions. Appraisers have to determine each home's value, title companies have to secure title insurance and search records, and settlement agents have to assemble all the paperwork and make sure the right people get their checks.

This mountain of work can present some real challenges. Some consumers have locked in their rate, only to lose that rate because the paperwork couldn't be completed before the lock-in expired.

"We are closing people within 25 days, which is faster than many other companies, but it is still longer than it used to be," Mr. Clifford says. "One thing you can do to speed things up is to work with your lender's appraiser and settlement company. There are people I have worked with for years, and they are going to get the paperwork done for me on time, but why would some appraiser who's never heard of me hustle to get my stuff done?"

Another challenge buyers face is the huge variety of loan products to choose from today.

"Consumers today have so many places to shop for a mortgage loan and so many types of mortgages to understand," Mr. Maloney says. "Typically, there isn't a huge difference on a conforming, fixed-rate loan, but if you look online, it may appear that there is a huge difference from lender to lender. If you find a low rate online and the quotes are often very low make sure you understand the points and fees involved."

As a general rule, rates that seem unusually low usually have a catch. Chances are slim that the lender is just a generous guy who wants to do you a favor. The points and lender fees you will pay might be so high that the savings disappear.

What is most important is that you use a lender with experience whom you can trust. This is especially true if you are a first-time or inexperienced buyer with a lot of questions.

Today, with so many new and confusing loan programs to choose from, you need someone who will serve as a financial adviser of sorts, helping you understand which loan is the best for you. A good rate on the right mortgage is much more valuable than a bargain-basement rate for a loan that does not suit you.

A second mortgage or home equity line of credit (HELOC) can present another snag in the refinancing process for some borrowers.

Because of the low rates in recent years, millions of homeowners have taken out HELOCs, but these blessings can become liabilities when you try to refinance.

"When a borrower has a second trust [HELOC] and they want to refinance their first trust, we have to go to the second-trust lender and get that company's blessing on the refinance," Mr. Clifford says. "In a sense, the borrower literally has to be approved again for their equity line because that lender wants to know that the borrower will still qualify for that loan after the refinance."

Because the process of communicating with another lender can take four to six weeks, the borrower's application gets put on hold. Meanwhile, rates might rise and their interest-rate lock-in might expire.

"The best advice I can give consumers today is to start their loan application now," Mr. Clifford says. "Even if you don't want to lock in a rate today, get the application process started. Then when you are ready to do it, you are further down the road. Don't sit on the fence waiting for rates to drop that extra eighth of a point to save $25 a month especially if your current mortgage is costing you $200 extra per month."

Consumers are watching rates carefully these days, and everyone wants to refinance when they hit bottom, but that is difficult to forecast.

"I don't think anyone can predict where interest rates are going to go," says Bill Brinkley, a senior vice president at Wachovia Bank. "So, since you can't look forward accurately, the only thing you can do is look back. I tell customers, 'Rates are at a 40-year low, so it is a very good time to refinance.' And it is."

Rates were significantly higher in recent history. Rates on a 30-year fixed-rate mortgage were about 8 percent in the mid-1990s, a number that seems pretty high today, but talk to someone who bought a home 20 years ago and you will understand how good 8 percent seems to them. In the early 1980s, 12 percent was considered a good rate. That is because the average 30-year mortgage rate was as high as 15 percent in 1984.

A mortgage rate below 10 percent was unimaginable back then and was not seen until 1989. Today's rates would have seemed like free money to consumers in the 1980s.

It is hard to maintain such a historical perspective, however, if you are striving to get the lowest possible rate today. Every tick in the rate seems like an earthquake, and it seems a tragedy if you refinanced just before rates fell further.

In reality, a half-point change in the rate of a 30-year fixed-rate mortgage only adds up to about $35 each month for a $100,000 loan, although that $35 can be hard to stomach if you missed a lower rate by just a few days.

So why do mortgage rates go up and down, anyway why is it such a roller coaster sometimes?

One common misconception is that mortgage rates are tied to the Federal Reserve Board interest rate that Fed Chairman Alan Greenspan so publicly raises and lowers.

"The Fed lowers their rate to free up capital, making it less expensive for companies to borrow money. That spurs business growth and helps the economy," Mr. Brinkley says, "but it has little to do with mortgage rates."

Mortgage rates sometimes rise when the Fed rate drops. That is because long-term interest rates, such as mortgages, are dictated by the people who want to buy and sell bonds. When the stock market fell, people moved money into the bond market which is considered a safer investment.

People who buy bonds are looking for secure investments. They want to invest for the long-term in something that is very safe. Because mortgages are long-term loans, they attract the same kind of investors as the bond market does.

"For example, if you come to me wanting buying bonds, I'll tell you that you can earn about 4.9 percent on a 30-year U.S. Treasury Bond," Mr. Brinkley says. "That's not bad, but I'll also tell you that you can get about 5.75 on a Freddie Mac [Federal Home Mortgage Corp.] mortgage-backed bond."

The mortgage-backed bond is simply a bundle of mortgages that Freddie Mac bought from banks and mortgage brokers. Investors can capitalize on the better interest the Freddie Mac mortgage-backed bonds offer.

There's a little more risk with a mortgage-backed bond, and that is why the rate is higher, but because this investment vehicle is similar to government bonds, the rates on mortgages rise and fall with the Treasury bonds.

"The best rule of thumb for understanding where mortgage rates are headed is to watch the 10-year Treasury bond," Mr. Clifford says. "A great example was the anthrax scare. Remember when they found a box of white powder in the Miami airport? It turned out to be detergent or something, but that day the bond market rallied big time because everyone was scared.

"When you don't know where the country is headed, you put your money in the U.S. Treasury," he says. "It's the safest investment out there. So, as money flowed into the bond market, bond yields dropped and mortgage rates dropped right along with them."

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