Sunday, July 11, 2004

Jump in now. That’s the advice from financial experts for people who are thinking about refinancing a home or buying one, in light of the recent drop in mortgage rates.

Those falling rates are seen as temporary. Forecasters predict rates will again start to climb slowly through next year.

“Strike while the iron is hot,” said Greg McBride, a financial analyst with, an online financial service.

“There is no telling exactly when they might quickly reverse course and move higher,” he said.

The mortgage company Freddie Mac reported last week that rates on 30-year and 15-year fixed-rate mortgages fell for the third week in a row and were at their lowest levels since the spring.

Rates on one-year, adjustable-rate mortgages were at their lowest point since the beginning of June.

The declines took experts by surprise.

The lower rates, generally speaking, reflected investors’ growing confidence in the Federal Reserve Board’s ability to keep inflation under control.

They also signal investors’ sense that the economy will grow solidly, though not so fast that Fed policy-makers would be forced to move aggressively in raising short-term interest rates.

Those market forces pushed down bond rates, which, in turn, depressed mortgage rates.

Benchmark 30-year mortgages dropped last week to 6.01 percent, while 15-year mortgages were at 5.42 percent and one-year ARMs at 4.05 percent, according to weekly figures compiled by Freddie Mac.

“It’s unlikely you’re going to see a decline of interest rates from where they are at today unless the economy starts to really dramatically slow, and I don’t know of anyone, including ourselves, who is forecasting that,” said Doug Duncan, chief economist at the Mortgage Bankers Association.

“So this is an opportunity. I would say that we’re going to see modestly rising rates in the next couple of years. This is a temporary dip. And, if you are ready to go, then go,” Mr. Duncan said.

By year’s end, rates on 30-year mortgages could reach 7 percent, 15-year rates 6.25 percent and one-year ARMs more than 5 percent, according to various estimates.

Lenders said the recent drop in rates has led to a burst of activity.

On the home-loan side, house hunters are deciding to go ahead and lock in deals before rates increase.

On the refinancing side, people are going with bigger loans at a lower rate and using the extra cash to pay for home improvements or reduce debts such as credit-card bills.

The Mortgage Bankers Association said its weekly index of mortgage applications — both for home purchases and for refinancings — increased by 19.5 percent for the week ending July 2, compared with the previous week.

Nicholas Farina, senior vice president of the consumer lending division at MortgageIT, an online mortgage company, said he is seeing homeowners who bought in the past year or two refinance a larger home loan than they started out with. That frees up extra cash for whatever they want.

Most other homeowners, he said, are more likely to have refinanced their mortgage last year, when rates fell to record lows. That powered not only a refinancing boom but also sent home sales to all-time highs in 2003.

In the middle of June 2003, rates on 30-year mortgages fell to 5.21 percent and rates on 15-year mortgages dropped to 4.60 percent. Both were the lowest since Freddie Mac began tracking them in 1971 and 1991, respectively.

Under one rule of thumb, people looking to refinance with the sole goal of reducing their monthly payments will want a rate that is at least two percentage points below their current rate, Mr. Farina said.

People also need to consider the closing costs for refinancing and compare that to the money they expect to save each year from lower mortgage payments.

“You better be able to pay off those transactions costs in two or three years; otherwise, it’s not worth it,” said Joe Phillips, dean of the Albers School of Business and Economics at Seattle University.

“There might be a tendency on the part of some people to refinance too much, too often and they are not realizing the transactions cost. You shouldn’t be taking four or five years to pay off the transactions cost for refinancing,” Mr. Phillips said.

Rates on 30-year mortgages hit a low this year of 5.38 percent. After that, those rates — along with rates on 15-year mortgages — moved upward in anticipation of an increase in short-term rates by the Federal Reserve. Thirty-year rates hit a high this year of 6.34 percent in the middle of May.

The Fed, wanting to head off inflation, ordered its first rate increase in four years on June 30, boosting a key short-term rate to 1.25 percent, from a 46-year low of 1 percent.

Fed policy-makers also held to the view that future rate increases would probably be gradual. But they also made clear that they would do what was necessary to keep the economy and inflation on an even keel.

The Fed’s message pleased investors. That — along with a government report, released July 2, showing disappointing gains in the nation’s payrolls in June — caused bond rates to fall, pushing down mortgage rates.

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