Monday, October 20, 2008

NOW MAY BE THE BEST OF TIMES—OR THE WORST OF TIMES—TO REFINANCE

With a dose of true grit, American homeowners may have to bite the bullet and learn to be happy with the roof they have over their heads at least until the nation’s housing crisis finds its way out of the wilderness, experts say.

“Home values are falling nationwide and homeowners own that loss,” said James E. Glassman, senior economist for JP Morgan Chase based in New York. “Homeowners have to think about holding on for the long haul.”

That’s why more and more Americans are contemplating saving some money with a refinance of their existing home mortgage. Home-loan applications for both refinancing and home purchases grew slightly in early October, according to the Mortgage Bankers Association.

And, home-loan rates were affordable, at least in mid-October, when 30-year fixed-rate mortgages averaged 5.94 percent, down from 6.10 percent a week earlier, reported Freddie Mac’s Primary Mortgage Market Survey. A year ago, the 30-year fixed-rate loan averaged 6.40 percent.

“Longer-term mortgage rates fell for the first time in three weeks, roughly following bond market yields,” said Frank Nothaft, Freddie Mac vice president and chief economist.

However, the volatility in the current home-loan market is unbelievable, according to Marc Kramer, mortgage broker with American Bank & Trust based in Oak Brook.

“We are on a fast roller-coaster ride, and mortgage rate quotes may only last 10 minutes,” Kramer said. “If you go home to discuss a mortgage choice with your spouse it may not be there in the morning.”

Since last week’s stock market crash and rebound, rates lenders are quoting on 30-year fixed mortgages have risen 1 percentage point with some lenders quoting 6.875 percent, Kramer said.

“And, that’s assuming the borrower has a 20-percent down payment and a great credit score of say, 720. If your score is 660 you may have to pay a rate that’s a quarter of 1 percentage point higher,” he said.

So if you can’t sell your home at a profit, now may be the time to refinance and cut your monthly payments. Today, experts say a homeowner should refinance if he or she can save $100 or more per month and break even within a year on closing costs, which can run up to $2,000 on a typical home.

Despite the nation’s gloomy financial outlook, the latest housing market data showed some pickup in home purchase activity in August. Pending existing home sales in August rose 7.4 percent, reflecting the largest monthly increase since October 2001, and July’s figures had an upward revision, according to the National Association of Realtors.

With savings down to nearly zero, Glassman said it is obvious most Americans do not believe in putting something away for a rainy day. The only equity they have may be in their homes, and now that is shrinking.

“In the future, today’s young consumers are going to have to be more like their parents,” Glassman told a group of Chicagoans at a recent apartment industry economic forecast sponsored by the Chicagoland Apartment Assn. “They need to learn how to create wealth by saving.”

If credit-card happy consumers can’t afford the best, Glassman said “they simply move down a notch on their product list and buy the next similar item.”

He also noted that the current financial crisis is not specifically a U.S. problem. “It is a global slowdown, and the U.S. is more proactive than Europe in trying to solve the problem,” he said. “Europe is directly affected by our economy because its people invested in our bad mortgages.”