Continuing low interest rates for 30-year mortgages — now hovering at 3.75 percent — may be sparking a new wave of refinancing.
Interest in refinancing is created by the power of suggestion — when a homeowner sees opportunity, said Jerome Scarpello of Leo Mortgage Inc., in suburban Philadelphia.
“I took an application last week, and the borrower said, ‘My brother told me rates are down, and this is a good time to refinance,'” Scarpello said.
Another borrower applied for a 20-year term — lowering the duration of the mortgage as well as the interest rate, he said. Currently, a popular choice is the 15-year mortgage, with rates being offered below 3 percent, Scarpello said.
“When I started in 1987, someone told me you have to lower your rate at least 2 percent for it to be worth it,” he said. Today, he continued, “I believe you should recoup your costs in two years — plus or minus — for it to be worth it.”
No big increases in interest rates are on the immediate horizon.
“Absolutely,” said Fred Glick, chief executive of U.S. Loans Mortgage Inc., in Philadelphia, when asked whether he had seen an uptick in refis. “The rates, along with the lifting of program restrictions in the aftermath of the 2008 (economic) crisis, has helped propel people into exploring refinancing.”
Mark Zandi, chief economist at Moody’s Analytics, said, “We are estimating $850 billion in refinancing in the first quarter, at an annual rate, up from $750 billion last year. As long as fixed rates remain below 4 percent, refi activity should remain strong.”
In 2015, refinancings made up half of all mortgage applications. This year, Sean Becketti, chief economist at Freddie Mac, the government-sponsored mortgage-loan giant, expects them to be 40 percent of the total.
That’s because the pool of borrowers who haven’t yet refinanced their mortgages is getting smaller, Becketti noted. “I think we will see refis in the neighborhood of 2014 ($500 billion), but less than last year.”
The wild card, he said, “is that we are seeing more cash-out refis, not ones to lower rates, especially among borrowers in areas of the country with homes that have more equity.”
Kristin Reynolds, an economist at IHS Global Insight, in Lexington, Mass., said, “March continues to be stronger than last year, as mortgage rates have declined relatively steadily year to date.”
In its most recent weekly tab of refinance applications, however, the Mortgage Bankers Association of America noted that the numbers had dipped by 3 percentage points.
The Federal Reserve’s decision last week to keep interest rates unchanged “may help refinancing in the near term,” Reynolds said, though the stage is set for a June boost in the federal funds rate.
Most industry observers had predicted that fixed-mortgage interest rates would increase in 2016 rather than decrease. One reason for the prediction was that the Federal Reserve was reducing its involvement in the mortgage-backed securities market.
Zandi said the Fed was still buying mortgage-backed securities to replace any it owns that are “prepaying or maturing,” but has stopped adding new ones.
Yet U.S. banks “have stepped up their buying” of mortgage-backed securities “in part to meet their stiffer liquidity requirements,” he said.
“Global investors have also been avid buyers, given the turmoil in global financial markets, since U.S.-backed (mortgage-backed securities) is, as they say, ‘Money good,'” Zandi said.
When demand for a finite number of mortgage-backed securities rises, prices go up and yields and interest rates decline.
If there are fewer investors buying mortgage-backed securities, prices drop and yields and interest rates increase, said economist Joel Naroff of Naroff Economic Advisors, in Holland, Pa.
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