Economic downturn has one upside: Homeowners can save big-time on mortgages

| The Baltimore Sun

1/8/2009 - 1/9/09

The economic turmoil of 2008 has left few bright spots, but here's one: Mortgage rates have plummeted.

Rates on 30-year, fixed loans are hovering around 5 percent — the lowest level since Freddie Mac began tracking rates in 1971. Some economists predict a further slide in rates once Barack Obama becomes president and rolls out an economic rescue plan.

And that could mean thousands of dollars in savings for homeowners.

"The people who have done everything right are now going to benefit and will be very well rewarded," said Mari Adam, a financial planner and owner of Adam Financial Associates Inc. in Boca Raton, Fla. "We are saying to our clients, anyone who can refinance should refinance. You can save a lot of money. People can make a real difference in their balance sheet."

As consumers struggle with rising costs or job instability, such attractive rates can offer much-needed relief on monthly payments. Other borrowers see an opportunity to pay off a mortgage sooner, or shed a risky adjustable rate and get the peace of mind that a fixed payment brings.

Although rates have dropped most on so-called "conforming" 30-year fixed mortgages, rates have drifted down as well on 30-year jumbo, or nonconforming, loans of more than $417,000 and on adjustable-rate mortgages. Nonconforming loan rates, however, are closer to 6.75 percent.

"The most asked question, the question of the century, is what will rates do?" said Neil Sweren, president of Allymac Mortgage Services in Owings Mills, Md.

With no clear answer to the question, brokers and other experts recommend that homeowners at least find out whether they qualify for a new loan.

The housing crisis and credit crunch have left many borrowers owing more than their house is worth, or with damaged credit, putting low rates out of reach for many as lenders have tightened standards.

But for those who do qualify, the opportunities are out there, with rates as low as 4.5 percent on 30-year mortgages.

Opinions differ on whether to lock in a rate that offers immediate savings, or gamble that rates will go lower.

"A lot of people are putting in applications ahead of time and waiting for a certain rate," said Earnest Sahady, owner of Nationwide Mortgage Services, a mortgage lender and broker in Rockville, Md.

"We don't expect rates to go much lower at all. If people are out there needing to pay off debt or change their adjustable-rate mortgages to a fixed rate, this is the time to do it."

Adam, the financial planner who says many of her clients are trying to refinance now, is considering a refinance of her own mortgage as well.

"But I'm more tempted to wait a month or two," she said. "When a new administration comes in and rolls out a stimulus (program), there may be further incentives for homeowners."

All agree that borrowers need to look beyond the low rates before plunging into a new mortgage. Refinancing makes sense for some situations, but not all.

Refinancing can cost from $2,000 to $3,000 or more in closing costs, and restarts the clock on the term of a new mortgage, whether for another 30 years or 15. Homeowners with a relatively small principal balance or with few years left to pay off a loan typically won't benefit from a refinancing, brokers said.

And refinancing probably won't make sense for borrowers who already have a fixed rate of 5 percent or below.

"You have to have some sense of what you're trying to accomplish," said Keith Gumbinger, a vice president at HSH Associates. "For many borrowers, that is to save money, but for many borrowers refinancing turns out to be a money-loser because they don't stay in the house long enough to get your money back from the transaction."

For instance, if you pay $2,700 in closing costs and cut monthly payments by
$150 a month, it would take 18 months to break even.

Rates have been dropping since late November, when the Federal Reserve stepped in to boost the housing market and spur the economy by making financing less costly and more readily available.

The government, pledging a total $800 billion, plans to invest in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae as well as debt issued by those government-sponsored corporations. The program should also improve credit card loans, auto loans and other borrowing.

The Fed's announcement initially sent mortgage rates to the lowest levels since February, and rates have continued their slide. As of Tuesday, HSH reported an average daily rate of 5.11 on a 30-year, fixed loan.

In its most recent report last week, Freddie Mac reported an average rate of 5.10 on 30-year loans, down from 6.04 percent the week that ended Nov. 20.

Still, for the most troubled borrowers, especially those with damaged credit, refinancing is likely not an option at all. Lenders and banks have tightened credit standards amid the turmoil in the housing and financial markets.

"If you can't pay your bills, can't prove your income and have no equity in your home, you're out of luck," Sweren said.