Exerpt:
Refinancing A Mortgage? Move Fast
Liz Moyer and Tatyana Shumsky 01.31.08, 6:00 AM ET
The Federal Reserve has chopped short-term rates twice in the span of eight days, pushing the overnight rate to 3%, the lowest since September 2005. Can we refinance our mortgages now?
A lot of homeowners certainly think so. Refinance applications made up 73% of total mortgage applications in the last week, up from 66% the previous week. The Mortgage Bankers Association's refinance index is up 29.3% in the last month and has doubled since August.
"We've seen a marked increase" since the beginning of the year, says Bob Harris, president of LendingTree.com. "And that's accelerated as a result of Fed rate cuts over the past two weeks."
Countrywide Financial (nyse: CFC - news - people ), the nation's largest lender, typically sees a 10% to 20% increase in refinancing applications come January. This year the company is on track to double the number it did in December. Executive Vice President Dave Routen calls the volume "extraordinary."
What many consumers forget is that it is the bond market, not the Fed, that determines mortgage rates. Short-term Fed rate cuts are designed to get the credit markets moving again. And the drop in the overnight rate means banks will begin lowering the interest rates they charge to credit card and home equity borrowers, not to mention corporations.
But homeowners who have been sitting on the sidelines to refinance have to move quickly. After falling to their lowest levels since March 2004, rates for a 30-year fixed mortgage and other products are on the rise.
The average 30-year rate rose to 5.60% from 5.49% for loans with 20% down payments. For a 15-year fixed rate, the interest rose to 5.04% from 4.96%, and for one-year adjustable rate mortgages, the interest rose to 5.70% from 5.51%, according to the Mortgage Bankers Association.
Time to strike now, says Quicken Loans chief economist Robert Walters, a Michigan online mortgage lender. "We don't get many opportunities to take a 30-year fixed below 6%," he said.
Any cut in the federal funds rate, which is the central bank's key policy tool, has its most immediate effect in the one-month London Interbank Offer Rate (LIBOR). A federal funds cut is reflected in mortgage rates within a week, said Douglas Duncan, chief economist at the Mortgage Bankers Association.
Those looking to refinance with a fixed mortgage, however, might be disappointed with the rate they get. The 30-year fixed mortgage is pegged to the benchmark 10-year Treasury bond, which is rising off a low.
Those with an adjustable-rate loan, which is pegged to shorter-term LIBOR or the one-year Treasury, might luck out more because those rates are still expected to decline.
Mark Vitner, an economist at Wachovia (nyse: WB - news - people ) in Charlotte, N.C., locked in his own mortgage rates last week. "I didn't get the lowest" rate, but it's still pretty good, he said. Refinancing activity is expected to stay relatively high through March, he added.
Not everyone is going to win, though. Those millions of people who have jumbo mortgages, typically for more than $417,000, will find that current jumbo mortgage rates are not as attractive as they were just a few years ago, according to Bankrate.com. Jumbo rates shot up last year as the credit market froze up. Banks were unable to sell the paper into the secondary market and stopped making so many of the loans so they wouldn't get stuck holding them.
And, of course, subprime borrowers are having trouble finding loans at all.
Borrowers in formerly hot real estate markets, including California, Florida, Nevada and parts of Arizona, might not be able to refinance because home values have fallen in those areas, putting many homeowners upside down in their mortgages. A lender wouldn't refinance in that situation unless the borrower paid cash to make up the difference.
Conditions now do offer a glimmer of hope for some. Pete Bonnikson, senior vice president at another online lender, E-Loan, said, "Lots of consumers in the last few years really trusted the mortgage broker or the lending officer, who really didn't do the right thing and got them in a wrong loan. This is an opportunity for them to refinance with a trusted lender and get themselves a great rate."
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