Homeowners taking advantage of plummeting interest rates

CNY Business Journal (1996+), Mar 09, 2001 by Fitting, Beth

Declining interest rates are prompting many homeowners to refinance their mortgages. And some are acquiring funds for other purposes through homeequity loans. In Central New York, says John Harris, regional sales manager in the Residential Mortgage Department of M&T Mortgage, the economic slowdown doesn't seem to have caused any reluctance among homeowners to proceed with plans to refinance their mortgages to take advantage of lower interest rates. "The majority know that they will be in a better position" even if they are laid off, with lower mortgage payments.

Robert F. Salter, vice president in retail banking at M&T Bank in Syracuse, adds, "if you use your home as collateral, the interest expense is tax deductible," unlike bank loans that are issued on other collateral.

MortgageIT, a leading online mortgage provider, in its "Winter MortgagelT Report," a quarterly survey of homeowners, polled more than 200 people who shopped online to refinance their mortgages between Jan. 19 and Feb. 19.

Respondents included both homeowners who planned to obtain a new loan online and those who may ultimately opt to use an off-line mortgage provider.

The poll showed that 64 percent of respondents were considering refinancing in order to lower their mortgage rate or increase their monthly cash flow, while 13 percent plan to convert from their existing adjustablerate mortgage to a fixed-rate loan. Mark S. Keller, vice president and marketing integration manager for the Syracuse market of Chase Bank, says that whether you choose a variable-rate or a fixed-rate mortgage depends on the current interest rate. "You look at how low the rate is going. Today, most choose a fixed-rate mortgage."

In the MortgageIT survey, 16 percent of respondents said they planned to obtain a "cash-out mortgage," which enables homeowners to take money out of the equity they have already built up in their home by obtaining a new loan that is larger than the remaining balance on their current mortgage. Harris explains that people will borrow more than they owe to do renovations on their home, thereby increasing its resale value.

Salter says "substantially more" people are using the equity in their homes to back loans. According to the MortgagelT survey, approximately a third of the respondents who are tapping their home's equity for other expenses plan to use the tax-free funds for home improvements. Salter lists the reasons people in Central New York are taking out home-equity loans, in order of frequency: 1) debt consolidation, 2) home improvement, 3) major purchase (auto, second home), and 4) education expenses.

And, Salter says, "there is little default on these loans. People are putting up their homes as collateral."

Two out of 10 respondents to the MortgageIT survey said they would use the money to either consolidate their debt or pay off credit cards. One out of 10 said they are taking money out of their home to pursue investment opportunities. Less popular reasons for a "cash out" mortgage include purchasing a car (6 percent), putting a down payment on a second home (6 percent), paying off students loans or paying for children's educational expenses (4 percent), and financing a vacation (2 percent).

The survey found that, although rates are lower than they have been since early 1999, many homeowners are gambling that they will continue to drop, While 36 percent said they planned to refinance within a month, 64 percent said they would wait to see if rates fell further - a sign, said the survey, that the current refinancing boom will continue at least through the spring. "A few people are still waiting," says Harris, for interest rates to go lower still. However, people in his department, Harris says, are saying that "the percentage of people refinancing is double or triple what it was a year ago."

Chase's Keller says that mortgage refinancing "has started to pick up, in anticipation of another interest rate reduction in March." He says that local mortgage representatives "have seen quite a bit of activity lately" but that people are "just looking for a reduction in interest rate." Most homeowners, he says, use their home equity line of credit for such projects as remodeling. "With a home equity loan," he explains, "there are no closing costs."

The MortgageIT survey found that homeowners "were a conservative group when it came to locking in a rate for the long haul. Ninety-four percent of the people polled preferred the security of fixedrate loans over adjustablerate mortgages. More than a quarter (26 percent) said they wanted to take advantage of today's low rates to switch from their existing adjustable-rate mortgage to a fixed-rate loan.

One reason people may choose a variable-rate mortgage is that almost all home-equity lines of credit are available only on variable-rate mortgages. And, as Salter says, this gives people "flexibility. They can be their own credit managers. People want choice."

Mark Pappas, president of MortgageIT, said, "We're also seeing a huge surge in the popularity of the 15-year fixed-rate mortgage. People are realizing that - with little or no increase in their monthly payments - they may be able to switch from a 30-year loan to a 15-year mortgage and, in the long run, shave thousands off of their payments and own their home 'free and clear' 14 years earlier."