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Denver-area homeowners could potentially save almost $600 million a year by refinancing their mortgages into the record-low rates available, according to an analysis by InsideRealEstateNews.com.
While there does appear to be an uptick in refinancing, phones are not ringing off the hook in lender offices. Meanwhile, even the trifecta of good news for home buyers – super-low rates, housing prices well off their peaks, and an increased of supply of unsold homes on the market to choose from – have not been driving people to buy homes. In June, the number of homes placed under contract plunged by 31 percent from June 2009.
InsideRealEstateNews used Census Bureau data and national reports to estimate the number of homeowners who could shave 2 percentage points or more off their mortgages. If they all did, it would save them an estimated $597.3 million annually, excluding the costs of refinancing. And the estimate is likely conservative, as some lenders say it makes sense for some homeowners to refinance, even if they could cut their mortgage rate by a half of a percent or less.
Crazy low rates
Zillow.com reported today that the average 30-year, fixed-rate at 4.49 percent, a 15-year, fixed-rate at 3.98 percent and a 5-year ARM at 3.98 percent. “It is absolutely crazy,” said Kay Cleland, president of the Colorado Association of Mortgage Brokers. “Everybody should be taking advantage of these unbelievably low mortgage interest rates.”
One way to look at it, is that refinancing would be the equivalent of the metro area homeowners getting a $600 million, tax-free raise.
“That would have a huge impact on the economy,” said independent real estate broker and consultant Gary Bauer. “And those savings would have a three or four times trickle rate, so if you take that $600 million, it could have a $2.4 billion impact on the economy. To put that into perspective, in the first six months of this year we sold $5.3 billion in homes, so the savings would be the equivalent of about 45 percent of the homes sold.”
He said he has one client who refinanced his mortgage and is now saving about $600 per month.
Fixed rates and ARMs attractive
Pete McGlynn recently refinanced his mortgage, cutting about two points from his mortgage.
Although he didn’t want to discuss exact numbers, he said he is saving so much he will recoup his closing costs in only two months, and the rest of the savings will be gravy.
“When you can save a third, it’s not really a tough one to think about,” McGlynn said.
Unlike many people he went from a 30-year-fixed-rate loan, which had about 27 years remaining on it, to a 7-year, adjustable rate mortgage.
“I had enough equity in my home to qualify for an interest-only ARM,” McGlynn said. McGlynn, a sophisticated purchaser who works in the financial arena, thought it was unlikely that he would spend 30 years in his 3,175-square-foot house, so he didn’t want to pay for 30-year money.
“I probably will be in my house for just about the length of my mortgage, and probably no more than 10 years,” he said.
Another person, so prominent that he has a spokesman, recently traded his $1.1 million, 5-year, interest-only loan with a 6-percent interest rate, for a $1.057 million, 30-year fixed-rate loan with a 5 percent interest rate, according to documents obtained by InsideRealEstateNews. That would save him about $920 a month in principal and interest payments.
The spokesman, who talked about the refinance on the condition that his employer’s name not be used, said that his boss is like thousands of other homeowners who wanted to save money. He also wanted the security of fixed-rate loan, he said. He didn’t take any money out of the home with the refinancing, even though the home is worth $1.508 million, according to public records. “He’s like thousands of other homeowners who wants to take advantage of the low rates,” the spokesman said.
Tough economy hurts refinancing
Yet, a surprisingly small number of homeowners are taking advantage of the lowest rates in their lifetime. During past periods of falling rates, consumers typically were beating down the doors of lenders. Many of them had to hire additional staff to meet the demand.
A big part of it could be the economy, said Mike Rinner, of the Genesis Group, which tracks housing along the Front Range.
“If you had a 50 percent drop in your income, no matter how low interest rates go, it might not help you,” Rinner said. “I don’t think people are dumb. They know interest rates are down. But I think the key is you also have to have jobs. Even though we might be slightly better in the Denver area and in Colorado than in the nation as a whole, there are fewer people working today than a year ago, and that is not encouraging. If people had jobs and were confident they would keep them, everything else would fall into place.”
Still, Rinner said if you can qualify for a lower rate and increase your cash flow, it is easy enough to estimate how long it will take to pay back the cost of refinancing, he said.
And increasingly homeowners are taking a advantage of the low rates, although not as many as many experts would expect.
Refinance surge is tame
“I think everyone’s business is up,” said Peter Lansing, president of Universal Lending, a sponsor of InsideRealEstateNews and one of the largest locally owned mortgage banking companies in the Denver area. “But I wouldn’t call it off the hook. I’d say we’re up 10 to 15 percent. In the past, when we saw big drops, we were up 40 percent or 50 percent.”
There are likely several reasons why more consumers aren’t cashing in on refinancing, Lansing said.
“No. 1, many people may have already financed to a level not as low as today’s rates, but still one they are happy with,” Lansing said. “No. 2, people are concerned about the appraised value of their homes. In some cases, they might have to bring cash to the closing to get the full value of the lower rates. And others might have job issues that are keeping them from refinancing.”
Part of it might be psychological, he said. Even if the numbers pencil out, some people may simply be numb to the super-low rates.
“I suspect for some people going from a 8 percent to a 6 percent loan may seem like a bigger deal than going from a 6 percent to a 4 percent loan,” Lansing said. “I don’t know why that is, but I suspect that could be part of it.”
Tom Clark, Executive Vice President of the Metro Denver Economic Development Corp., agreed that more people should be taking advantage of the low rates.
“I cannot tell you how many people I have been talking with who have $200,000, $300,000 mortgages, and they know they should be refinancing, but just aren’t,” Clark said. “I think the reason people are hesitating, when it it is in their best interests, is all relative to how freaked out they are by the economy. With everything going on, it just leads to this kind of paralysis. It’s amazing what inertia can do. It really is giving yourself a pay raise without having to argue with your boss. It’s free money.”
Lansing said that rates this low are astounding.
“We put my sister into a 6.125 percent loan last year, and I thought we were giving her the lowest rate she would ever have,” Lansing said. “I thought that was going to be her last mortgage. And we just did a refinance for her for a 20-year loan. It has a rate of 4.125 percent, I think.”
Underwater homes don’t sink refinancing
Anita Padilla-Fitzgerald, president and CEO of MegaStar Financial, said she thinks media reports of falling home values may have convinced consumers that their homes won’t appraise at high enough values to refinance. However, she noted that the Federal Housing Administration, Fannie Mae and Freddie Mac all have programs that allow refinances without appraisals.
Still, reports that homeowners can’t take advantage of the low rates might be one reason that MegaStar’s business is currently 70 percent for purchases and 30 percent for refinances. Often, when rates were falling, many lenders experienced the opposite – 70 percent refinances and 30 percent purchases.
Depending on the situation, it could make sense for some people to refinance for a half-percent or less, Padilla-Fitzgerald said.
“It might make some sense for some people to go from a 5 percent to a 4.5 percent loan,” she said.
One road-block for some people refinancing is that they can’t roll their closing costs into the new loan, because their homes are so deeply under water – that is, their mortgages are worth far more than their homes, even when using various programs that don’t require appraisals, said Tom Gross, a mortgage broker with Crestline Mortgage, which is part of Universal Lending. Those programs include Freddie Mac Streamline and Fannie Mae RefiPlus and DU RefiPlus, as well as some FHA and VA programs.
“I just haven’t had any clients who want to do that,” Gross said.
But Dan Brown, principal of Spire Financial, said that is not a huge problem. If a homeowner has no equity in their home, he said a lender can often structure a loan that is higher than the rates available to the most qualified borrowers with great credit scores and lots of equity, but still lower than the existing.
Few loans for self-employed
A bigger problem is that while loans are relatively easy to get for people with standard paychecks and W-2 income, there are few options available for the self-employed. For example, a business owner might take a lot of write-offs, which under-estimates how much the owner actually earns.
Brown has one client who makes $80,000 a month, has an 800-credit score, and a a great deal of equity in his home, but it still took four months to find a lender willing to refinance his loan.
“I know a lady who wanted to buy a home in Boulder for $400,000,” Brown said.”She does not currently have a job, but she is receiving a settlement from her brother’s death, which will mean $1.6 million in her bank over the next two years and nine month. He said she was planning to make a large down payment, but didn’t want to pay cash and use up a quarter of her assets. But when she couldn’t get a loan, she walked away.
“Think of that poor home seller,” Brown said. “He thought he had a buyer of his home at a reasonable price. Now, he has to put it back on the market.”
Get help help from a pro
Brown said because every case is different, the old rule of thumb that you need to lower your rate by a full percentage point, is not true for everyone.
“If you have a $417,000 mortgage, it might make sense to refinance if you can drop your rate by a half percent, because the savings are so great,” Brown said. “But if you have a $100,000 loan, it might only make sense if you can lower it by a full percentage point or a point and a half. Anyone who tells you there are rules of thumb is just full of it. This is not a business where one size fits all.”
And for some people, it doesn’t make sense to refinance, no matter how low rates fall.
One homeowner in Evergreen, for example, has only 6.5 years left before his loan is paid off, and so has been ignoring the siren call of low rates.
“He is absolutely right,” Brown said. “When you’re that close to paying it off, you are paying mostly principal, anyway. There is no point of amortizing a loan over 15 or 30 years, when you can see the light at the end of the tunnel.”
The only exception might be if a sophisticated borrower was looking at the home as just another asset that could generate cheap money, which could be used to invest that could provide a much greater return than the negligible after-tax cost of the mortgage.
But if Brown could leave consumers with only one piece of advice, it would be to encourage them not to do it alone. He suggests that they use a trusted mortgage broker or mortgage banker that they have used in the past, or has been referred to them by someone they trust.
“I tell people I don’t care if it is me; I honestly don’t,” Brown said. “I don’t think it is a good idea to get a loan through the Internet or by calling a 800 number. If you try to navigate this process yourself, you are taking a big risk. Discuss your particular situation with someone who you trust. Tell them exactly what your goal and he can help you achieve those goals.”