Americans refinance as rates fall below 5 percent

12/18/2008

CHARLOTTE - Tony Jabon had an e-mail in to his mortgage broker by 10 a.m.

The 35-year-old environmental consultant in Charlotte had heard about the Federal Reserve's decision to cut its key interest rate to nearly zero and wanted to refinance to something lower than 5.5 percent.

Within hours, he had locked in a rate of about 4.6 percent. He'll save about $160 on his monthly payment.

Homeowners nationwide did the same yesterday. Mortgage brokers reported a surge of calls from borrowers seeking to take advantage of the Fed's extraordinary decision. Some brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments.

The national average rate on 30-year, fixed mortgages was 5.06 percent yesterday, according to financial publisher HSH Associates - the lowest since the 1960s and down from 5.3 percent Tuesday.

"This is beautiful, oh my gosh!" said Patti Mazzara, a mortgage broker in the Minne-apolis suburb of Edina, who was surprised when she looked up rates and found them well below 5 percent, down at least three-quarters of a percentage point from earlier in the week. "This is a whole new game now. Hopefully it's going to give people some relief."

The Fed, aiming to free up lending and jolt the economy back to life, cut the federal funds rate Tuesday from 1 percent to a target range of zero to 0.25 percent and pledged to funnel money into the market for mortgage investments.

It was the best news in months for anyone looking to lock in a 30-year, fixed-rate mortgage. But it was not expected to be a cure-all, and borrowers already in danger of foreclosure probably won't be able to take advantage.

"It's a call to action for homeowners looking to get out of adjustable-rate mortgages," said Greg McBride, senior financial analyst at Bankrate.com. "Unfortunately, it's not an equal-opportunity party."

"It doesn't solve the problem for people who owe more than their home is worth, but for the significant majority who are able to refinance, it is quite a boon," said Bob Walters, chief economist at Quicken Loans in Livonia, Mich.

Wall Street, which pushed the Dow industrials up 360 points after the Fed announcement, tempered its enthusiasm yesterday. The Dow finished down about 100 points.

An estimated 12 million Americans owe more on their home loans than their houses' value, unemployment is rising quickly, and foreclosures are soaring.

For people whose home values have plunged, "I could have a 1 percent interest rate, but it wouldn't help them," said Michael Maynard, a mortgage broker in Branford, Conn.

"People losing their homes aren't losing their homes because they can't get a 6 percent mortgage," Mr. Maynard said. "They're not qualifying at all."

In Charlotte, Mr. Jabon's mortgage broker, Will Mullinix, said that while rates that low are "pretty unprecedented," the best deals are available only to borrowers with pristine credit who are taking out loans for under 80 percent of their house's current value.

Economists expect falling rates to provide only a modest boost to home sales, especially as unemployment worsens.

Though mortgage rates had been hovering at four-year lows, stringent lenders have made getting loans approved more difficult.

Lower rates and a two-year slump in house prices improve affordability. But spiking unemployment and fears of deep recession have curbed appetite for new home purchases.

New home building and permits to build plunged to record lows in November, tumbling almost 50 percent from a year earlier the Commerce Department said Tuesday. The silver lining is that the oversupply of houses that helps depress prices is pared as building shrinks.

"There are elements in the housing market that are not a disaster," said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. "There is still a huge inventory overhang, but it's moving in the right direction."