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August 21, 2002
Los Gatos, California Since 1881 |
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Low interest rates entice buyers, refi's
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Jean Newton
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As a result of a sluggish economic recovery,
interest rates dipped to a 32-year low,
spurring a boom in refinance activity and
enticing buyers into the real estate market.
According to Freddie Mac's primary mortgage
market survey, the 30-year fixed-rate
mortgage averaged 6.31 percent, with an
average 0.6 point, breaking the previous
32-year low record of just two weeks ago.
Last year at the same time, the 30-year
fixed-rate mortgage averaged 7 percent.
The 15-year fixed-rate mortgage dropped to
5.69 percent, with an average 0.6 point, down
from a year ago, when it averaged 6.54
percent. The 15-year fixed rate reached the
lowest figure since August of 1991.
"Recent downward revisions of the gross
domestic product for 2001 and the first
quarter of 2002 suggest that the economy
faces weak growth," said Frank Nothaft,
Freddie Mac's chief economist. "This led to
the anticipation that the fed will reduce
overnight interest rates by the end of the
year, if not sooner. That expectation, in
turn, has created a boon for potential and
existing homeowners in the form of lower
mortgage rates."
Many buyers are coming back into the market
to take advantage of the low rates, according
to Jimmy Kang, a home mortgage consultant for
Wells Fargo in Menlo Park.
"As rates drop, more buyers are able to
afford the payments. We offer a loan program
that gives buyers a low rate, low payments,
no negative amortization and more buyer
power. As a result, some buyers are finding
that, with the drop in prices, they may be
able to afford more house than ever before.
Some are upgrading from a townhouse to a
single-family home," said Kang.
With the volume at historic highs, Kang said
Wells Fargo Home Mortgage surpassed last
year's record by June of this year.
"The mortgage industry is at over capacity.
The entire mortgage system was not set up to
handle this much volume, as normally only a
small percentage of all loans refinance
during the course of a year. By now, almost
the majority of loans have been or are in the
process of being refinanced," said Kang.
This means buyers as well as sellers need to
realize that approvals and appraisals are
taking a little longer than normal.
"As a direct lender, we went from four-hour
approvals to four days. Although we are able
to add more underwriters and processors, it
is more difficult to add more appraisers, as
they need to be certified by the state of
California," said Kang.
"Purchases are a priority and we are still
getting appraisals back in 10 to 12 calendar
days. So, some financing contingencies need
to be at least two weeks if possible. This is
a good reason why all buyers should be
preapproved by a legitimate lender in
advance," he added.
While lower interest rates are a boon to
first-time homebuyers, a refinancing flury is
well under way in response to historically
low mortgage rates. In recent weeks, Freddie
Mac reported that refinance activity has
risen to approximately 65 percent of mortgage
applications nationwide.
Realtor Kathy Stakey of Coldwell Banker in
Saratoga quoted the California Association of
Realtors figure of 68.4 as the percentage for
mortgage activity in the refinance area.
Scott Larson, a licensed real estate broker
and loan consultant with Washington Mutual,
said he is seeing a significantly higher
number of applications on the refinance end
of the market. While some purchases are
coming out of the low interest trend, Scott
feels that it is primarily home prices, not
interest rates, driving the market for sales.
"My busiest prequalified market is for
$400,000 or less, with some move-up buyers in
the $650,000 to $800,000 range," said Larson.
"Some loans are stretching the amounts that
borrowers can quality for, and fast closings
are still happening."
On the refinance front, Larson is seeing
record volume and said the time frame for
closing is beginning to creep up. "People who
are shopping for rates need to make sure they
are being quoted 'lockable' rates. Many
brokers are quoting 15-day rates to get
borrowers in the door, and not being able to
lock on these quoted rates. While rates
remain relatively stable, they may be able to
deliver, but if rates move upward, many
borrowers may be hurt," he said.
When locking in a rate for purchase or
refinance, borrowers need to know if they are
able to "float down" the rate. "When we lock
a rate we can allow the borrowers to break
the lock for a fee and go to the lower rate.
This allows the borrower to be protected if
rates go up, and yet get the advantage of
lower rates if they go down," Larson
explained.
Recently, Larson found a couple of instances
where buyers have come to him to rescue deals
that have been delayed as the time for
closing approaches. He believes direct
lenders have an advantage on purchases in
this type of market.
"We have our own appraisal and underwriting,
so we can make things happen to close
purchases on time. I'm sure there are many
on-time closings daily, but there have been
more of these kinds of circumstances
happening recently," Larson said.
The feds kept the target for the federal
fund's interest rate unchanged at 1.75
percent last week, relying in part on already
low interest rates and a still-robust
underlying growth in productivity to foster
an improving business climate over time.
According to Freddie Mac, this has been a
strong year for home sales and mortgages for
home purchase and could top the records set
last year if refinancing activity continues
at its current pace. The forecast is for
interest rates to remain low for some time,
continuing to support a vibrant housing
market.
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