Grab The Mortgage Papers, It May Be Time To Refinance

Thoughts of sugar plums and holiday cheer may be dancing through your head this month, but top economists suggest you pause to focus on something that could save you a lot of money: The mortgage refinancing boom that's shaping up for early 1996.

Some analysts argue that a refinancing boom already is in progress. They cite data from the latest Mortgage Bankers Association of America loan application index showing that nearly 40 percent of new loans currently being taken out are for refinancings of existing mortgages - double the normal rate, and almost five times what it was in the early months of 1995.

What's going on here? And what could it mean for you? Here's a quick overview. As recently as last August, 30-year home mortgage rates hovered in the 8 1/4 percent range. Last week's national average, by contrast, was 7.6 percent, according to the rate monitoring firm of HSH Associates, Butler, N.J. The emerging trendlines for interest rates may be even more significant. David Lereah, chief economist for the Mortgage Bankers Association, says virtually all key indicators point to lower rates in 1996:

Inflation and the rate of national economic growth continue to be at low levels.

-- The Federal Reserve Board is widely expected to administer another downward tweak on rates in the near future, probably after the holiday season.

-- Despite the possibility of a breakdown this month in Capitol Hill negotiations over a seven-year balanced budget, both parties appear headed toward some form of eventual compromise that cuts federal spending and eliminates annual deficits early in the new century. The capital markets already assume such a result, and are encouraged by it.

Super-low interest rates in Japan may even be having an unexpected side-effect on the American economy. Heavy demand from Japanese investors for higher-yielding Treasury securities may be exerting downward pressure on bond rates, possibly by as much as one quarter of a percentage point in recent weeks.

Lereah, who's had solid success with his rate projections in the past two years, doesn't equivocate about 1996: "I think we're going to see lower rates," he says, "and I think they are here for a while." The current low-inflation environment is like the 1960s, when mortgage rates in the 5 percent and 6 percent range were the rule.

Don't hold your breath for the return of interest rates that low, but Lereah says 30-year fixed rates of 7 1/4 percent or even 7 percent are entirely possible in the first half of the new year. What could that mean for you? Plenty, especially if your current mortgage carries an adjustable rate, or a fixed rate in the low 8's or above.

Even if you last financed as recently as early 1995, you might be able to save money by refinancing again - maybe in the next 30 to 90 days. For example, Keith Gumbinger, vice president of HSH Associates, says there was a surge in adjustable-rate mortgages in late 1994 and early 1995, most of which carried attractive 6 1/4 percent to 6 1/2 percent first-year rates. These are all now approaching their initial adjustment anniversaries at a fully indexed annual rate of about 8 1/4 percent.

With fixed rates now falling through the mid-7's, "those people (with one-year adjustables) are going to either jump to a fixed rate or get hammered," says Gumbinger. And if rates drop even further in 1996 to 7 1/4 or lower, "the pain (of an 8 1/4 adjustable) is going to get more intense." The difference in monthly payments between a 30-year, $175,000 one-year adjustable at 8 1/4 percent and a fixed rate of 7 1/4 percent is $121. Over the course of the first year alone that totals a hard-to-ignore $1,452.

Of course, with any refinancing, you have to figure in the costs of the transaction - not only mortgage origination fees, but appraisal, title, taxes and related expenses. The longer it takes to recoup those upfront fees through savings on lower monthly payments, the less advantageous a refinancing is to you. There's no magic rule here; it depends on your own needs and tolerances. But if you can recoup the costs in under 24 months and you plan to live in the house for many years, a refinance into a fixed, lower rate probably is a smart move.

Mortgage analysts like Gumbinger predict that lenders and mortgage servicers will soon respond to all this by offering attractive low and no-fee refinance plans. Some lenders in metropolitan markets already advertise no-fee 15-year loans at 7 1/4 percent. A month or two from now, if predictions of lower rates prove correct, the ads may well be touting 30-year no-fee loans at 7 1/4 percent.

The bottom line here: Stay alert. In Lereah's words, "when you see that your own mortgage rate is one percentage point higher than the market, it's time to call your current lender or servicer to see what refi options may be available." Your current servicer, after all, doesn't want to lose your business to a lower-rate competitor.

(Copyright, 1995, Washington Post Writers Group).