Homeowners gripped by refinancing frenzy Interest rates are at their lowest level in 20 years

February 28, 1993|By Joseph Rebello | Joseph Rebello,The Kansas City Star

KANSAS CITY, Mo. -- American homeowners, pouncing on the lowest interest rates in 20 years, have rushed to their lenders in a refinancing frenzy unmatched since banks began cutting mortgage rates more than a year ago.

The rush to cut mortgage payments reflects new fear about President Clinton's plan for fixing the economy, experts say. Many consumers, already worried about higher taxes, no longer believe that interest rates will drop further.

Economists aren't so sure. Some say that rates could sink further, although not by much, if Mr. Clinton's economic plan is approved. On the other hand, many say, rates could soar if Congress rejects the plan.

On Wednesday, the average rate for a 30-year fixed mortgage reached 7.6 percent, the lowest since 1973, according to the Mortgage Bankers Association of America. As a result, refinancing accounted for nearly half of all applications made last week.

"We basically doubled our volume" for the month, said Debbie Frisbie, a vice president at the Columbia Savings Association in Overland Park, Kan.

Many homeowners said they visited lenders Wednesday with a well-grounded sense of urgency. The bond market, after surging in response to Mr. Clinton's economic package, sagged Wednesday, and many mortgage bankers considered raising their rates.

The price of the Treasury's 30-year bond, a key indicator of long-term interest rates that influences mortgage rates, fell three-fourths of a point, or $7.50 per $1,000 in face amount. Its yield, meanwhile, rose to 6.88 percent.

Jim Nutter Jr., executive vice president of James B. Nutter & Co., one of Kansas City's biggest mortgage bankers, said that if the bond slump continued, he might raise rates one-eighth of a percentage point.

Many consumers said that thinking is just what they fear. "I'd be a fool not to take advantage of this while I can," said Lorrie Hester, a manager at the Kansas City Power & Light Co. She and her husband shaved $150 off their monthly payment by refinancing.

By not refinancing earlier, Ted Kitten, a salesman for a surgical-instruments company, gambled -- correctly -- that rates would plummet for months after the Federal Reserve Board cut a key interest rate in December 1991 to stimulate the economy. Now, he said, he is ready to make his move.

"This was totally a gut feeling on my part," said Mr. Kitten, who saved $200 on his monthly payments by refinancing. "But I think this is the right time for me."

Mr. Clinton, in announcing his plan for economic recovery, also gambled -- that interest rates would drop in response to his plan. A drop in interest rates, the president said, would more than offset the burden of new taxes on the middle class.

So far, he has proved right. After Mr. Clinton unveiled his plan a week-and-a-half ago, Treasury bond yields, a key indicator of long-term interest rates, dropped to their lowest level in 20 years.

That sparked a refinancing boom that many lenders said was the biggest since December 1991. But for many consumers and lenders alike, the mood is hardly jubilant.

"I fear money's going to get tight, and interest rates are going to be higher," said Ms. Hester, the KCP&L manager. " I wanted to make sure I got the rate before it went up."

For the first time in years, lenders need not lead homeowners through complex calculations about whether refinancing is wise. The advice, for most, is to refinance -- unless a homeowner is paying less than 9 percent on a 30-year mortgage.

The standard advice to homeowners has been not to refinance (( unless one can obtain a mortgage 2 percentage points lower. But lenders say they are now telling homeowners to disregard that advice.

"If you've got an $80,000-to-$100,000 loan, even 1 percent makes a tremendous difference," Ms. Frisbie said.

Mr. Nutter agreed. The key, he said, lies less in interest rates than in the closing costs and down payments lenders may ask for. And a homeowner must consider how long he or she intends to live in the house.

For Ms. Hester, who has lived in her home for 16 years, that meant one type of refinancing. For Mr. Kitten, who does not expect to stay in his home longer than seven years, it meant another.

"There's a lot of good deals right now," Ms. Hester said. "I saved 2 points by refinancing now, and it didn't cost me anything."

Mr. Kitten also took a no-cost loan, but he gained a seven-year balloon mortgage with a conversion option. That means that at the end of seven years, he can pay off the balance in one balloon payment or convert it to the prevailing rate.

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