Low Interest Rates Provide a Historic Opportunity
“We are straight out,” said Deloria, senior vice president of Commercial and Retail Lending at United Bank. “We’ve already reached our goals for the year, which is a really nice feeling.”
But that assessment comes with a caveat; although the volume of new mortgages is on a slow rise, refinancing has accounted for 85% of the bank’s total home-loan business. “The purchase business has not been as huge, and we may not see that begin until next year,” she said. “But we’ve got a lot of applications in the pipeline for purchases, so we’re starting to see an uptick in that business, which is a good sign.”
Refinancing, however — thanks to an extended period of historically low interest rates — has been booming across Western Mass. and beyond.
“Activity is actually really strong right now,” said Bob Michel, senior vice president at Hampden Bank. “Probably two-thirds are still refinances, not purchases, but we do sense a strengthening for purchases. It’s not overwhelming — we still have a long way to go on that side of the market — but it has certainly improved. The continually dropping rates have helped people.”
As for the refinance market, even homeowners who purchased within the past few years are finding opportunities to lower their rates. “They did not expect to get that opportunity so soon,” he said, “because the rates they previously financed at were so low to begin with.”
Bob Michel says programs are available to assist people who otherwise couldn’t refinance due to equity lost in the housing crash.
Indeed, rates that hovered around 6% before the housing bubble burst of 2008, then fell to around 4% in the years that followed, have since dipped to just over 3% for long-term loans and even below that threshold for many 10-year or shorter mortgages. And that provides plenty of opportunity for homeowners to save money, shorten their terms, or, in many cases, both.
“Our volume overall this year is 50% over last year,” said James Sherbo, senior vice president of Consumer Lending at PeoplesBank, with new purchases up 40% over last year but refinances driving much more of the increase. “We’ve definitely seen more activity; rates are at a record lows, and that’s certainly helping to drive volume. Refinances haven’t slowed down, but we’ve also seen an uptick in the purchase business.”
For this issue’s focus on banking and financial services, BusinessWest examines how a refinance boom is driving strong business in the mortgage market, and asks area lenders why borrowers are coming back to refinance. In most cases, the answer is simply, “why not?”
Sherbo said most people choose to refinance for one of three reasons: to pull some cash out of their property, to shorten their term, or to drop their monthly payment. “With the rate dropping all the time, maybe they can keep in the same range as they’re paying now, but take some years off the loan.”
James Sherbo says most borrowers refinance to lower their payment or shorten their term — and sometimes both.
For many borrowers — say, those who took out a 30-year loan five or more years ago — refinancing often provides an opportunity to both lower their payment and shrink the life of the loan. “Think about it,” he said. “The rates we had a few years ago were in the 5% to 6% range, and now they’re in the 3% range. You can accomplish a lot with that.”
Deloria said the question of whether to refinance or hold steady isn’t a one-size-fits-all situation, but something that should be determined on a case-by-case basis.
“We want to see if we can get someone from a 30- or 20-year amortization into a 10- or 15-year payment, where their payment may be staying the same, but we’re shaving 10 or 15 years off of it. We just had an individual come in with 22 years left, and we got him down to a 10-year amortization with the same payment; we shaved 12 years off.”
As a general rule of thumb, Deloria said gaining one full percentage point is a good reason to at least run the numbers — although it sometimes takes a greater rate decrease, depending on how recently the loan was purchased, to shave significant years off the back end.
“Right now, we’re focusing on trying to keep the payment the same as we get the amortization down; we’ve been trying to accelerate the amortization schedule for a lot of individuals,” she said.
She noted, however, that some customers aren’t interested in shortening the life of their loan, but simply crave short-term relief in their household budget. “We’ve seen both sides of it; we’ve seen people who just financed their house two years ago and want to refinance now to get some savings; they never thought the rates would get this low.
“Every time we look at the rates, I’m amazed too,” she added, noting, for example, that United offers a 10-year loan with no points at 2.5%.
Michel said many people are missing out by not paying attention to the potential benefits of refinancing.
“I think, today, you’ve got to look at the numbers,” he said, noting that gaining 1% to 1.5% in the interest rate is usually enough to benefit financially, even though the costs of the process must be taken into account.
“Closing costs are a bit more expensive, with increased government regulation impacting the cost of refinancing,” he explained. “Depending on what your credit score is, whether you’re taking cash out on the refinance, and what type of property it is, we have seen an increase in the cost of closing.”
Still, Hampden Bank — and the other banks BusinessWest spoke with — have certainly seen a rush of homeowners interested in refinancing. In some cases, Michel said — not often enough, to his thinking — they’re using the act of shortening their terms as a sort of long-term financial tool.
“That’s especially true of people in their early to mid-50s, who are possibly starting to think about retirement. One thing I’m thrilled to see is more people realizing that, if you can arrange to come into retirement mortgage-free, it really gives you some advantages in the quality of your retirement life. But I don’t think enough people look at their mortgage as part of their financial planning.”
Michel added that Hampden offers some specialized, in-house programs to dramatically shorten the life of a loan, and borrowers would do well to run the numbers to see if, after closing costs and other considerations, they would do well to reopen the loan. “If you’ve got a decent rate that you’re comfortable with, it might not make sense.”
He recommended talking to a mortgage lender, but there are other ways to find out if a refinance might be worthwhile. “You can go online. We all have calculators online so you can take your current, outstanding loan and see how much savings you can get. Then, after you estimate the closing costs and divide them into it, you can see how many years it’ll take to make that money back.”
While many people don’t think to investigate the potential savings available through refinancing, or simply don’t want to go through with the perceived hassle of the loan process, Sherbo said it’s easier than they might imagine.
“It’s not hard to do — even to take out an initial mortgage,” he said. “In today’s environment, with the technology we have, it’s a very easy process, and refinancing is just as easy. It’s hard to imagine there are folks out there who haven’t done it yet, but there are, and we’re trying to make it as easy as possible for them.”
That means providing the ability to apply online, or by visiting a branch and speaking with a loan officer, he said. “We’re trying to give the customer as many options as possible to make it easy for them. They have a choice, and it’s all about giving customers choices.”
For some borrowers, however, refinancing is a tease of sorts, because home values have been battered since 2008, drastically shrinking and often eliminating the equity required to redo the loan.
“I think the big challenge is still values,” Deloria said. “Values are still slowly gaining momentum, but sometimes it’s very frustrating for a borrower who is at 7%, and they could lower their rate to 3.625%, but we can’t get them there because of the value of their house.
“It’s hard to say to an existing customer, ‘we know you’re committed to making your payments, but we can’t change your rate because the value isn’t there,’” she continued, adding that lenders are optimistic that a strengthening housing market will lift all values and give these particular homeowners some relief. “As new purchases come through, hopefully that will also help values increase.”
In the meantime, the federal government has opened doors for many of those homeowners, Michel noted. “A program that both Fannie and Freddie are running right now allows people to refinance who have good credit and the ability to pay, but don’t have equity. This program allows them to refinance without taking appraised value into consideration. It’s really affording a lot of people to move into the current low rates who otherwise would not have been able to do so because of a lack of equity in their homes.
“This is something the government should have looked at some time ago,” he continued. “Again, this is helping people maintain their mortgage — people who have not thought about walking away from their loan, they’ve done all the right things, but the market turned on them as far as their equity position goes. I think, going forward, this will allow a lot of people who have been struggling with their mortgage to strengthen their position, and help them through this period until we see an uptick in the economy.”
That improvement in the economic picture is coming, Sherbo said, citing industry statistics suggesting that purchases will outpace refinances in 2013, reversing current trends.
“If there was ever a time to finance buying a house, now is the time,” Sherbo said, citing the current interest rates. “And home sales are up across the state, year over year, from September of last year to September of this year. I think there will be an uptick in the percentage of business that’s purchases, and we are gearing up for that.”
As for what’s next for interest rates — in particular, the question of whether they will remain historically low or begin to rise again — “we all wish we had that crystal ball,” he told BusinessWest. “But all economists are saying we’ll probably see rates at this level for awhile. While nobody’s commenting on just how long — because nobody really knows — we’re not expecting any drastic changes too soon.”
That means an extended opportunity for homeowners who have not yet taken advantage of a historic opportunity to pocket some extra cash, both now and over the years to come.
Joseph Bednar can be reached at email@example.com