Low Mortgage Rates Have Homeowners Rushing to Refinance

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The rush to take advantage of the lower interest rates has resulted in "unprecedented activity" among local mortgage brokers, title companies and banks.

"We haven't seen rates this low since the early '70s," said Mike Shara, branch manager for a mortgage company in Santa Barbara.

According to the Freddie Mac Primary Mortgage Market Survey, the 30-year fixed mortgage rate fell to a national average of 6.31 percent last week, its lowest level in 32 years. In comparison, the 30-year fixed rate averaged about 8 percent in 2000 and 10 percent in 1990. It reached as high as 17 percent in 1981.

Last year, when interest rates dropped to a then-record setting 6.97 percent, many industry analysts had predicted that rates had bottomed out and had nowhere to go but up.

But a stubbornly sluggish economy, which has refused to recover as quickly as expected, has pushed interest rates to new lows. Interest rates dropped as many investors pulled money out of the stock market and put it into less risky bonds. More money going in the bond market causes the interest rate paid on them to fall. Fixed mortgage rates move in the same direction as the interest paid on bonds.

Industry experts and financial analysts expect mortgage rates to stay below the 7 percent range at least until the end of the year. There's even been a lively debate among investors whether the Federal Reserve might lower a key interest rate further at the Fed's meeting today, seen as unlikely but not impossible. Other rates generally follow the direction of the fed funds rate.

The current record low interest rates have been especially attractive for those looking to refinance higher-rate mortgages.

Refinancing at a lower interest rate allows homeowners to reduce their monthly mortgage payments and to pull out cash from the equity they have built up in their homes. The cash can be used to consolidate other debt, make home improvements, or finance education and other big-ticket purchases.

While there's no shortage of those looking to refinance or to initiate a mortgage loan, it's a different story for those within the industry.

The length of time needed to underwrite a loan is taking about one to two weeks, said Harlan Greene, a mortgage banker in Santa Barbara.

"Before this refinancing boom hit it took only about 72 hours to underwrite a loan," Mr. Greene said.

Most mortgage loan activity on the South Coast has been concentrated in refinancings, said several industry experts.

About 75 percent of the activity is in refinancings, which is "unusually high," said Mr. Shara, at a mortgage company.

Nevertheless, he said that the number of mortgages taken out for home purchases, especially for homes in the $ 1 million and up range, has also hit a high mark.

"We're seeing a lot of move-up activity because of the increased affordability due to lower interest rates," said Mr. Shara.

Like many local financial firms, Chase Manhattan Mortgage has had to increase its staffing to handle the rush of mortgage loan activity.

"We can't find enough qualified people. We had to go through a headhunter just to find someone to process loans, that's how bad it is," he said.

Barbara Heitman, division president for Stewart Title, agrees. She said her firm has had to increase its staff by 10 percent over the last two months just to keep up with the flurry of activity, and the sheer volume of transactions has put a strain on everyone involved in the loan closing process.

"It's taking about two weeks to get an appraisal done. Normally it could get done in a few days," said Ms. Heitman. "That's the biggest thing slowing (the closings) down right now."

Things are just as busy in Santa Maria, but unlike the South Coast, more mortgage transactions tend to be going toward home purchases, said Peggy Watkins, real estate loan officer in Santa Maria.

Ms. Watkins said that she's seeing about 60 percent of her mortgage loans going toward home purchases, and 40 percent to refinancing.

"We have a lot more new homes in the area, and we're seeing a lot of people selling their older homes to move into the newer ones. There's a lot of trade up going on out here," she said.

More homeowners are also finding that the 15-year fixed loan is a more attractive option than 30-year loan, she said.

With some 15-year loans hovering in the mid-5 percent fixed rate range, homeowners are able to build equity faster and pay off their loan sooner for about the same monthly payment as what they had with a higher rate 30-year mortgage, Ms. Watkins said.

Most mortgage lenders in the county say that 30-year fixed rate loans are hovering in the low 6 percent range, plus one "point." A point is one percent of the loan amount, which is the cost of obtaining the loan.

Although there are some mortgage brokers offering no points and no fees, those "freebies" usually translate into a higher interest rate, said Mr. Shara at Chase Manhattan Mortgage.

The no points and no fees loan usually translates into a half-point increase in the interest rate, he said. "There's really no such thing as a really low rate and no cost."