2018-04-18 / Real Estate

In mortgage market, refinancings take a hit


For homeowners looking to reduce mortgage payments, get a lower interest rate or take out more cash on their homes, mortgage refinancing is a way of replacing an old mortgage with a newer, better one. But the benefits of refinancing loans have decreased in recent years, and as a result, fewer people are going the refinancing route. According to local brokers, it’s affecting the mortgage business.

Following the financial collapse of 2008, the U.S. Federal Reserve Bank cut interest rates to near-zero and kept them there for seven years. But in today’s robust economy, the Fed has been acting to raise interest rates to prevent inflation, and that means higher rates on loans. As a result, the heydays of 3.5 percent fixed 30-year mortgage rates or 2.75 percent 15-year rates of a few years ago are becoming a distant memory, Richmond-area mortgage brokers say.

Refinancing rates have recently jumped from 4 percent to more than 4.5 percent, forcing borrowers and brokers to reassess how they can handle the hikes. “Refinancing used to be 50 percent of our business and now it is 20 percent,” says Lanny Butler, a loan officer at All American Mortgages in Henrico County.

Long a staple of the mortgage finance business, refinancing loans have dropped significantly in the last few years. In 2017, refinancings made up just 37 percent of mortgage-origination loans across the country, according to the Wall Street Journal, the lowest point in more than 20 years. That’s not to say refinancings have disappeared. “There’s still plenty of refinancing business out there,” says Bill Lyons, a senior loan officer at Union Mortgage, part of Union Bank & Trust, off Parham Road in Henrico.

One still-healthy source of business: homeowners looking to combine first mortgages and second, line-of-credit mortgages into one under a lower rate than they’re currently paying. This helps consolidate equity lines and pay bills, and helps some families manage college tuition payments, Lyons says.

A motivating factor is that second-mortgage home equity lines of credit usually have adjustable interest rates that can go up suddenly. Current lending conditions and upward pressure on rates will make paying for those loans more expensive in the future. So, it might be wise to fold them into one new refinanced mortgage at a lower rate, Lyons says.

Will Ballentine, senior vice president and branch manager at George Mason Mortgage in Richmond, says “rates are still good” for this type of consolidation but otherwise, the bloom is off the rose.

“Obviously, most of the people who can refinance have. If you are doing refinancing (as a loan officer), you are sitting twiddling your thumbs,” he says.

Part of the decline is due to tighter lending requirements following the housing collapse of a decade ago. Credit scores have become more important. “It’s very credit-driven,” says Ballentine. For those who have good credit scores, interest rates are considerably lower. For a conventional buyer with a strong credit score of, say, 760, when compared to a lesser score of 660, that score can shave half a percentage point off the refinanced mortgage. “That’s pretty significant,” Ballentine says. Another factor affecting refinancings is Veterans Affairs loans, Ballentine says. VA loan applications typically require less documentation and don’t require the borrower to make down payments. While that might seem attractive and easier, VA loans tend to lower equity and lead borrowers to opt for adjustable rates, he says.

VA loans are popular with internet-based loan companies, as an adjustable rate can go up at any time, benefiting the lender. “You hear [it] a lot with call centers – adjustable rates. That’s not good for the client,” says Ballentine, who says he avoids that type of loan.

What’s next? A continued trend toward higher refinancing rates, loan officers say. On March 21, the Fed raised its benchmark rate 25 basis points to a range of 1.50 percent to 1.75 percent. The next day, many banks raised their prime lending rates to 4.75 percent. The Fed signaled in March that it would raise interest rates two more times this year.

Refinancing rates are expected to continue to rise in step with Fed moves. Lyons expects that refinancing rates could go as high as 5.5 percent by the end of this year; Butler expects it to stay under 5 percent, and Ballentine sees rates in the 5 percent to 5.25 percent range.

Of course, those estimates could change. According to minutes from the Fed’s March meeting, some members are urging the bank to consider raising interest rates even faster than previously planned. If that happens, mortgage rates could follow. ¦

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