refinancing

Minnesota homeowner Matt Kreger refinanced his $168,000 mortgage into a 4.75 percent 30-year fixed-rate three weeks ago, to get out of a 5-year, interest-only ARM with a 5.7 percent rate, which was set to change at the end of September.

Borrowers such as Kreger were part of a push before Labor Day to close on the greatest number of mortgage purchase applications since May. And, new mortgage data indicates, just before interest rates on 30-year and 15-year loans increased slightly last week. The Mortgage Bankers Association reported a 6.3 percent increase in purchase applications over last week's data, which revealed a 37 percent drop compared to the same week in 2009. This week's numbers show that purchase applications are 38.8 percent lower than the same week one year ago.

"My payment is about the same, only $50 more, but I am paying more toward principal," says Kreger, of Eden Prairie, who works in the residential new construction and remodel industry.

Kreger also is maintaining a second mortgage of $35,000 at 7.875 percent that he couldn't refinance. "My mortgage is upside down," he says. "So I still have the two loans, which sucks." In order to refinance both loans into one, "I would've had to bring $30,000 to the table," he adds. "I was not going to liquidate all of my assets to refinance my house, especially not with my industry. I am lucky to have a good salary, but we are doing more work on smaller jobs and not making as much money as we used to make."

Danny Kofke, a special education teacher and father of two who lives just outside of Atlanta, Ga., saw interest rates drop and decided to make his move. Twice.

Kofke refinanced his mortgage twice in the past three years, switching from a 30-year fixed-rate mortgage at 6.5 percent to a 20-year mortgage at 5.5 percent in the spring of 2008 and eventually to a 15-year loan with a 4.5 percent interest rate in the spring of 2009. That's a 55% decrease in his mortgage rate.

"We have to pay an additional $10 a month compared to the 20-year loan but will have our house paid-off four years earlier," Kofke explains. Our main goal is to be completely debt-free as soon as possible."

He's not alone. Low interest rates are spurring a boom in mortgage refinancing as homeowners look to lower their mortgage payments to help reduce their monthly expenses. According to a recent Freddie Mac report, most borrowers who are refinancing in the face of stupendous rate drops are opting for shorter-term, fixed-rate loans.

Essentially, homeowners are increasingly betting that interest rates will soon rise.

Home loan refinancing activity jumped more than 17 percent in the week ending August 13, compared with the previous week, to reach its highest level in 15 months, according to the Mortgage Bankers Association's Refinance Index.

"We are on the verge of another mini refinance boom," says Richard J. Martin, senior vice president at DE Capital, a joint venture between Wells Fargo and broker Prudential Douglas Elliman. Martin expects low rates to last through the fall, a time when interest rates are historically favorable.

Are you stuck with high mortgage interest, but think you can't refinance because you owe more than the house is worth? You may still be able to qualify for a Fannie Mae Refi Plus loan.

You can get a refi for up to 125 percent of your home's value. That means if the current market value is $200,000, you can get a mortgage up to $250,000. So even if your house is underwater, if you're stuck with a loan above 6 percent, you should still talk with your lender about a Fannie Mae Refi Plus loan. You may also want to use this program to lock in a low fixed rate, if you still have an adjustable rate mortgage.

The loan must currently be owned by Fannie Mae. You can find out if your loan is eligible by using the Fannie Mae lookup tool. If you find out your loan is owned by Fannie Mae, your next step is to call your loan servicer. You can find out if your servicer is in the Fannie Mae network and a contact number for him using Fannie Mae's search tool.

The refinance process for Fannie Mae has been streamlined and you may not even need to get an appraisal or credit check, as long as you have been paying your mortgage on time.

In a move that's of interest to job hunters, homeowners and hopeful Americans alike, a handful of the nation's largest banks are ramping up their staff to increase lending operations, reports CNNMoney.com.

Though the economic indicators -- new-home sales plummeting to a record low, wobbling home prices and high unemployment-- don't necessarily signal that the current climate is going to change any time soon, some banks believe a turnaround is the lending sector is looming.

And to prove it, a few lenders are bringing on hundreds of new mortgage officers. JP Morgan Chase, the second-biggest U.S. bank by assets, is in the process of hiring 1,200 mortgage officers.

And others are showing it on the books, too.

Providence, R.I.-based Citizens Bank, which operates out of a dozen states, saw its lending increase 167 percent in 2009 over the previous year. In 2010, the bank is adding more than a 100 loan originators, with plans to up this number of new employees in their lending office to 400 by 2013.

But one economist is chiming in that this increase in staff may becoming a little too early.

An apple a day keeps the doctor away, while a low mortgage rate ... keeps recession at bay?

That's the thinking at Morgan Stanley, where economists have published research arguing, among others things, that rock-bottom mortgage rates are helping the US economy avoid a double-dip recession.

In the report, Richard Berner and David Greenlaw acknowledge that the U.S. economy continues to face significant risks, such as potential spillover from Europe's sovereign debt crisis and a slowdown of housing demand after expiration of the homebuyer tax credit.

But they argue that the recent wave of refinancings, along with other factors such as lower energy costs, should offset any negatives.

"The dip in conventional 30-year mortgage rates to about 4.8 percent has triggered a minor refinancing boom," they write. "Reduced debt service will further add to discretionary spending power for many mortgage borrowers."

In plain English: Less money spent on servicing your mortgage is more money to spend on goods and services, such as sandals, pedicures and Lady Gaga's used jewelry. This spending goes straight to business' bottom lines, which then makes them more likely to hire. And that, in short, is how you fuel economic growth.

Unfortunately, not many economists agree with the premise.

Back at the end of March when the Fed stopped buying mortgage-backed assets, economists predicted that mortgage interest rates would start to drift higher toward 6 percent.

Well, they were wrong: Rates dropped to 4.2 percent for a 15-year fixed-rate mortgage and 4.87 percent for a 30-year fixed-rate mortgage.

What caused interest rates to head in the opposite direction? We can credit a perfect financial storm that is actually helping home buyers and home refinancers for a change:

• The Euro-zone financial woes drove investors to the safe haven of bonds, so that's helping to keep rates low.
• Purchase applications dropped 27 percent last week reducing pressure on rates, according to the Mortgage Bankers Association.
• With this weak financial news, it's likely the Fed will not raise its benchmark until at least August and probably not until October, if not later.

So if you thought you missed your best chance to refinance, think again.

Gone are the days when homeowners "cashed out" on the equity of their homes through refinancing, and used the money to pay off other bills, renovate a kitchen, or jet to Bora Bora. Stringent, post-housing-boom lending policies mean a gain in popularity for the complete opposite of the cash-out refi -- the cash-in refinance.

A cash-in refinance, or paying down the principal of a loan, is when a homeowner brings a check to closing and gets a new mortgage for a smaller amount. Last year, this type of refinancing climbed. In the last three months of 2009, the cash-in refi accounted for one-third of Freddie Mac-owned loans.

To find out the advantages of a cash-in refinancing, HousingWatch talked to some real estate experts for tips on why this might be the route some homeowners should take....
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With rates still low, why are mortgage applications falling?

Here's the short answer: The unemployment rate, which isn't falling.

Despite the extension of the government's special tax credit for new home buyers, and the fact that interest rates on 30 year fixed-rate mortgages remain at rock bottom (averaging 5.02 percent last week vs. 5 percent a week earlier), applications for all home loans actually fell last week by almost 11 percent, according to the Mortgage Bankers Association.

Refinancings have been especially hard hit. While loans for buying a new home, adjusted for seasonal variables, were down 3.3% from the prior week, applications for refinancing existing mortgages plummeted slightly more than 15%.

About a third of all the people who refinanced their home loans in the last months of 2009 lowered their principal balance, typically by writing a check to their bank for tens of thousands of dollars.

It used to be that many people refinanced to squeeze money out of their homes. Higher home values, lower interest rates, or both allowed borrowers to increase the size of their original home loans and get their hands on thousands of dollars in cash.

Now, people seem more interested in lowering their debt than treating their house like an ATM. No wonder refinancings are down.

It seems some folks are giving up on the American Dream.

A Rasmussen Reports national telephone survey finds that a mere 55% of adults say buying a home is the best investment families can make. That's down from 59% last November, 67% last May and 79% in June 2008. A similar question on a Fannie Mae's National Housing survey found that in 1996, a whopping 89% of Americans believed one was better off owning a home rather than renting.

The new skeptics include folks like Dave Guilford, a former stockbroker and small business owner who, in November 2008, sold his Mandeville, La. home for $220,000 and put his stake in a 4-bedroom Paris rental. "If it's up to me, we'll never own another home again, unless it's investment property and not our own residence," he says. "I'm perfectly content to rent for the rest of my life."

Guilford, 40, managed to scrape some equity out of the home, which he bought for $180,000 in 2003. But he thinks he would've gotten a better return if he had put the money into stocks or a retirement savings account -- especially after watching the home's value fall from its peak of $350,000.

"Owning your principal residence is perhaps the worst investment an adult can make," he says. "A lot of marketing has gone into convincing Americans that this is a good investment, when it is in fact a horrible investment for 90% of the population."

It's understandable why a bank might not want to to refinance a home that is underwater, or where the owner can't show enough income to justify the rate. But what about a perfectly normal mortgage?

The New York Times had a recent piece about otherwise qualified homeowners who try to refinance their mortgages at today's ultra-low rates, but are turned away. The issue may be among the topics that President Obama will address with the so-called "fat cat" bankers in the coming weeks.

In the meantime, it happened to yours truly as recently as last week on my condo in suburban D.C.

Like everyone else, I'd been seeing (and writing) the headlines about how rates are very low right now, but likely to go higher next spring. So I was ready to lock in lower rates.

The mortgage on my primary residence is with Washington Mutual, so I waited until Chase finished it's consolidation of WaMu before calling to see about refinancing my adjustable-rate mortgage, which unlocks this coming summer. This finally happened in October/November.