Sinking rates lift savings

Mortgages: Interest rates have dropped significantly, causing homebuyers to wait to lock in rates and igniting a wave of refinancings by homeowners.

January 14, 2001|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

Teresa Bowman wouldn't necessarily label herself a gambler. A "floater" might be a better description.

Bowman is just weeks from closing on a three-bedroom split-level home in Catonsville. But from the time she found the house in late October to late last week, she has seen her mortgage rate dwindle from 8 percent to 7 percent. That means her monthly principal and interest payment has dwindled as well, from $1,027 to $936.

But she wants more.

In mortgage lingo, Bowman is "floating" her rate. She's a borrower who instead of locking in an exact interest rate at a specific time, takes the gamble that mortgages will "float" down to a more favorable rate before it's time to go to settlement.

"When I first talked [with the mortgage company] they were up there almost 7.75, 8 percent, and then [last] week they dropped, and I'm just kind of hanging on, seeing if maybe they will drop a little bit more, and then I'll lock in at the lowest rate that I can," said Bowman, fitness and aerobics director for Merritt Athletic Club near Security Square Mall.

Mortgage rates have decreased since May, when 30-year, fixed-rate mortgages were flirting with 9 percent. Since then, almost 2 points have been shaved off the rate, delighting numerous borrowers and igniting another wave of refinancing by homeowners.

According to the latest Freddie Mac weekly national survey, the average 30-year, fixed-rate mortgage has dropped to 6.89 percent, the lowest since April 23, 1999, when it was 6.88 percent. A year ago, the Freddie Mac 30-year, fixed-rate mortgage was at 8.18 percent.

As for the Baltimore market, the 30-year, fixed-rate mortgage fell Friday to 7.16 percent. The last time it was that low was May 21, 1999, when it hit 7.11 percent. But as recently as May, the rate had climbed to 8.68 percent. On a $150,000 loan, the monthly difference in principal and interest between a rate of 7.16 percent and 8.68 percent is $158.

The Federal Reserve Board's surprise move this month to lower short-term rates by a half percentage point didn't have an impact on the mortgage markets. Most lenders had anticipated the cut and had reflected it into their mortgage products, hence the lower rates long before the Fed's rate cut. Some lenders saw their rates bump up slightly as money flowed from the bond market - which guides mortgage rates - back into the stock market.

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"When you have every front page of every newspaper in the country with the lead article being the Fed drops the discount rate a half percent, that probably is the best form of advertising that we could have," said Theodore E. "Chip" Reichhart Jr., president of First Horizon Home Loans, MNC Division.

"The public perception is that all interest rates are coming down, [but] it generates the activity that maybe it is something that [consumers] should look at," he said.

And with another Fed meeting at the end of the month, will the market begin to anticipate another cut and begin building it into their rates, or have consumers seen the bottom of the barrel?

"If and when the Fed does actually make the move, I think mortgage rates will go down, but not nearly as much as the Fed change," said Robert Van Order, chief economist at Freddie Mac. "What I mean by that is that if the Fed over the next couple of months overall would make a [half-point] move down, I don't think mortgage rates would go down [that much]. They would go down more like [a tenth] or something. Most of it has been built in."

David Berson, an economist at Fannie Mae, issued an economic report that speculated that if the Fed aggressively cuts rates and the economy does not respond, "then mortgage rates could drop to 6.5 percent or below - and lead to a record round of refinancings and a new high in mortgage originations."

But if that scenario plays out, "it would not be a happy world," said Van Order. "It would probably mean a recession."

Few industry people are predicting a recession, but they are comfortable with saying that mortgage rates for the next several months should stay at about 7 percent.

"Actually there is a little bit of opportunity for rates to decline a little bit yet," said Keith Gumbinger, a vice president at HSH Associates. "But the more that the Fed cuts interest rates, the greater the likelihood that the economy will begin to revive.

"That's not to say we could see a dip, a short-term decline. But the market in the last several weeks has especially counted on increasingly bad news. If the news isn't that bad, or even starts to show signs of improvement, mortgage interest rates could rise."

Lowest rates since early '99

Yet with mortgage rates at their lowest point since spring 1999, could another surge in the housing market be on the horizon?

"With declining interest rates, you do drag a few more people into the marketplace," Gumbinger said. "But when you are talking about a purchase, there is a whole combination of factors, the planets almost have to align in some way.

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