Homeowners who have resisted the urge to refinance their
mortgages until now could be rewarded for their willpower. Mortgage rates have
fallen to new lows -- and banks are rolling out incentives to win business.
Economic uncertainty in Europe and slow growth in the U.S. are prompting
investors to pile into ultrasafe U.S. Treasurys. That, in turn, is pushing down
mortgage rates, which are tied to Treasurys.
The average interest rate
on a 30-year mortgage fell to 4.05% for the week ended Dec. 23, the lowest in 60
years, according to HSH Associates, a mortgage-data firm. And rates on jumbo
mortgages -- private loans that in most parts of the country are larger than
$417,000 -- also have hit new lows, averaging 4.61%.
"It's hard to argue
rates will get much lower than they are today," says Stuart Gabriel, director of
the Ziman Center for Real Estate at the University of California, Los
Angeles.
That's good news for homeowners. A person who refinanced a
$400,000 30-year mortgage in February would pay an interest rate of 5.04% on
average, according to HSH Associates, and fork over $2,157 a month; at the
current rate of 4.05%, he'd save $236 per month, or $2,830 per
year.
What's more, demand for refinancing is declining, since many
homeowners already took advantage of lower mortgage rates. Applications for
refinancing are 17% below this year's peak in September, according to the latest
data from the Mortgage Bankers Association.
That and other factors have
prompted some lenders to offer incentives to win new business -- particularly
regional and community banks, which are focusing more on jumbo mortgages, says
Stu Feldstein, president at SMR Research, which tracks the mortgage market.
The discounts can be sizable. Regional bank Valley National Bank charges
homeowners in New Jersey and eastern Pennsylvania a flat fee of $499 for closing
costs on mortgages as large as $1 million. Since average closing costs on a
refinance run about 2% of the total loan amount, a person with an $800,000
mortgage could save about $15,500.
A spokesman for the bank says it is
aggressively marketing the discount in part to bring in more
customers.
While many lenders don't refinance mortgages that are larger
than about $2 million, Union Bank -- which has branches in California, Oregon
and Washington -- refinances up to $4 million at no extra cost. (Many banks that
refinance multimillion-dollar mortgages tack up to an extra quarter of a
percentage point on the interest rate.)
Since November, Union Bank has
also allowed borrowers to roll the costs of a refinance, like the appraisal fee
and loan processing fee, into the mortgage. And borrowers whose original
mortgage is from Union Bank don't have to provide all of the income
documentation that other customers do in order to refinance.
In part, the
bank's goal is to develop relationships with high-net-worth clients, says Stuart
Bernstein, national production manager of residential lending at Union
Bank.
Despite the incentives, many would-be applicants remain sidelined
because they can't meet the long list of qualifications.
The home-equity
requirement is one of the toughest hurdles, says Mr. Feldstein. Homeowners with
at least 10% home equity make the cut, but people with less have a tougher
time.
Borrowers with 10% to 19% equity in their home usually have to buy
private mortgage insurance, whose cost varies based on many factors, including
their credit score. A borrower with 15% equity and a FICO credit score above 720
could pay 0.44% of the total loan amount, says Keith Gumbinger, vice president
at HSH Associates. On an $800,000 loan that would be $3,520 a year -- eating
into the potential savings of a refinance.
In December, the federal
government rolled out a revamped version of the Home Affordable Refinance
Program with relaxed home-equity requirements, to allow more borrowers to
refinance. To qualify, the current mortgage must be owned or guaranteed by
Freddie Mac or Fannie Mae, and borrowers need to be mostly current on
payments.
For regular refinancing, applicants need a FICO credit score of
at least 740 to get the best rates, says Mr. Gumbinger. And they must provide
copious documentation, including at least two years' worth of tax returns and
proof of income as well as recent statements for assets such as retirement and
brokerage accounts.
After clearing those hurdles, you might wait about 60
days for refinancing to be completed, says Mr. Gumbinger --longer than the
typical 45 days. While some lenders are offering 60-day rate locks for free,
others charge a quarter of a percentage point of the total loan amount for the
service. On an $800,000 mortgage, that's $2,000.
Or you could opt to take
your chances with a free 45-day lock and hope rates don't spike between day 46
and the date your loan closes. With the euro zone still in economic crisis and
global investors rushing to the safety of U.S. Treasurys, housing-market
analysts say it could be at least six months before rates rise
significantly.
Source: Wall Street Journal 12/31/11