The New York Times
April 6, 2003

The Irresistible Appeal of Refinancing
By EDWIN McDOWELL

APPLICATIONS for mortgage refinancings have continued at record levels in recent weeks, buoyed by the attraction of low interest rates that have brought homeowners back to the table to arrange lower-cost loans. The surge continued a pattern in which refinancing applications have outpaced initial applications in most months over the last two years.

Rates continued to fall last year and in the first quarter of 2003. Some economists acknowledge that they have been surprised by the persistence of the decline in rates. "A few months ago," said Phil Colling, an economist with the Mortgage Bankers Association, "we were expecting that interest rates would rise, but instead they kept falling."

The average rate for 30-year fixed rate mortgages decreased to 5.79 percent for the week that ended on Friday from 5.91 percent the week ended March 28. For the week ended March 21, the rate was 5.79 percent.

Loan applications for refinancings have been consistently strong in reports compiled by the mortgage bankers' group ever since the middle of last year, Mr. Colling said. Although the proportion of refinancing applications as a percentage of all applications for the week ended March 28, 73.3 percent, was down from 76.5 percent the week of March 21 and the record high of 80.5 percent the week ended March 14, Mr. Colling said the figure for the week ended March 28 was still the seventh highest level on record. "There are still a large number of mortgage applications flowing into the pipeline," he said.

David Berson, the chief economist at Fannie Mae, said that the extraordinarily high proportion of refinancing applications reflects considerable sophistication on the part of home owners. "It shows that people know what's happening with interest rates," he said.

Sarah and Bryan McNitt would seem to be such people. Last October they moved out of their apartment in Manhattan and into a two-story colonial house on 1.7 acres that they bought for $450,000 in Valley Cottage, in Rockland County. The couple -- she is 32, her husband 37 -- took out a $364,000 30-year fixed-rate loan at 6.625 percent.

But they are already refinancing. When they close on the new loan, which is expected next week, the rate for their $369,000 30-year fixed loan will be a most-attractive 5.5 percent. The larger mortgage covers closing costs of $5,000, including about $1,000 in prepaid interest for the time between the loan's closing and the first full payment. Beginning June 1, when their first payment is due, their monthly mortgage payments will drop to $2,095.14 from $2,330.73, a saving of $235.59 a month.

"We bought our house because it's beautiful," Mrs. McNitt said, "and because the drive to Manhattan, where we work, is only about 25 minutes." They also bought the house because they plan on having a family, and because, she added, "brick and mortar is the safest investment there is now." The McNitts are not alone in that assumption, with savings accounts offering anemic rates of interest and the stock market in decline. Some 5.6 million existing homes were sold last year as well as a record 976,000 new homes, according to the National Association of Home Builders. New home sales declined 8.1 percent in February, however, but the association attributes that drop to a combination of bad winter weather and uncertainty about the economy and about the war in Iraq. David Seiders, the association's chief economist, said the industry remains on track to reach 972,000 new single-family sales this year, just short of last year's record.

In recent days economists specializing in housing issues have been preoccupied with the interplay of the economy, the war and interest rates.

Orawin Velz, senior economist at Fannie Mae, said that while the economy is not likely to pick up before the third quarter, the rate on 30-year fixed mortgages is likely to stay below 6 percent for the year.

Rising interest rates would, of course, have an effect on refinancing. Keith T. Gumbinger, a vice president of HSH Associates, a financial publisher in Butler, N.J., said that in the next month or so, for each week that rates are above 6 percent, refinancing activity would dwindle. If rates were to rise to 6.25 percent or higher, he added, there might be an initial jump in refinancing activity, because people might see it as a last chance to refinance. "But if rates go to 6 1/2 percent," he said, "the majority of refinances would be over with."

During the surge of refinancings, the interest rate has not the only factor than homeowners studied. Some saw it as an occasion to shorten the term of their mortgage. While the 30-year fixed mortgage remains the loan of choice, some lenders say many homeowners who refinance are opting for 15-year fixed-term mortgages, thereby halving their loan term to 180 months. Interest rates are typically lower on 15-year loans, but monthly payments, of course, are higher.

For example, assuming no prepayment of principal or interest, a $150,000 fixed-rate loan for 30 years at 6 percent would cost the borrower $899.33 a month, while a 15-year $150,000 fixed loan at 5.125 percent would cost $1,195.98 a month. The difference in monthly payments would be $296.65. But the borrower who could manage the higher monthly payment would save $108,480.77 over the life of the loan.

Despite the long-term savings, Michael Moskowitz, the president of Equity Now, a Manhattan mortgage lender, said that lenders who routinely advise refinancing from 30-year to 15-year mortgages may be doing a disservice to many homeowners. "Though the interest savings is meaningful, say 0.25 to 0.5 percent, the monthly payment is about $200 higher on a 15-year loan for every $100,000 borrowed," he said. "So despite their best intentions, many homeowners have trouble making the higher payments, especially on loans of $200,000 to $400,000 and higher.

"While some homeowners are financially strong enough to handle the 15-year payments," he said, "I recommend that most refinance at the 30-year term. They can always make additional or higher payments if and when they have extra money, while not feeling obligated to do so."

Dr. Oded Marcovici, a Manhattan veterinarian, is an example of a borrower who prefers a 30-year fixed mortgage. He took out such a mortgage when he bought his co-op brownstone on the Upper West Side in 1999, and he did it again this February when he refinanced. The first time, he chose a $202,000 30-year fixed-rate mortgage at 7.375 percent, and when he refinanced he took another 30-year fixed loan, but this time for $201,500 at 6 percent interest, for a difference in interest rates of 1.375 percent. His new loan included $1,500 for closing costs, which will take eight months to recoup. But his monthly payments dropped from $1,395.16 to 1,208.90 -- a saving of $186.26 a month.

"The first time I talked about refinancing, people told me, 'Don't do it if the rate is less than two percentage points, because it isn't worth it,' " Dr. Marcovici said. "But why isn't it worth it? It's like found money."