Rate trim spurs rush to refinance mortgages

NEW YORK -- This week's surprise rate cut by the Federal Reserve not only held Wall Street and investors in thrall, but it's also kicked into high gear a rush by homeowners across the country to refinance their mortgages at today's lower rates.

Rates on 30-year mortgages dropped for a fourth-straight week to the lowest level in nearly four years. Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 5.48 percent this week, down from 5.69 percent last week.

The new rate marked the lowest point for 30-year mortgages since they averaged 5.40 percent the week of March 25, 2004.

The Fed's unexpected reduction of the overnight bank lending rate by three-quarters of a point to 3.5 percent this week doesn't necessarily mean mortgage rates will drop by a similar amount.

Mortgage lenders tend to peg their rates instead to the yield on the 1-year Treasury note or 3-month London Interbank Offered rates.

However, the Fed's action was a response to worrisome economic and credit market developments that also have been pushing mortgage rates lower in recent months. And it seems to have set off a light bulb above the heads of many homeowners.

In general, a mortgage is deemed "refinanceable" if it is 0.40 percentage points above current average mortgage rates. And the recent drops in mortgage rates have made up to 7 million mortgages, or more than 70 percent of U.S. mortgages, eligible for refinancing, according to Tony Crescenzi, a fixed-income analyst at Miller Tabak.

The Mortgage Bankers Association said refinancings last week reached their highest levels since April 2004. The trade group's Market Composite Index, a measure of mortgage loan application volume, rose 8.3 percent from the previous week's level.

David Motley, president of Fort Worth-based Colonial National Mortgage, which originates loans in all 50 states, is expecting an even larger applications surge this week and beyond.

"For the last six to eight months, all people have heard about is the subprime crunch," he said. "There is an incorrect impression that because of the subprime mess regular people can't get a loan or a refinancing right now."

The rush to refinance could get a further boost from the government's tentative economic stimulus package. The package would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages worth as much as $729,750, up from a prior cap of $417,000 limit. This would make refinancing more feasible for some owners of expensive mortgages.

Motley noted that mortgage rates were attractive before this week's Fed action, but "the Fed move got everyone's attention and people are now looking at rates again," he said, adding that refinancing funds are "readily available to many Americans."

Even so, experts say that securing refinancings at terms they want may prove difficult for owners whose homes have slumped in value.

Joe Dougherty, a media relations officer for Rand Corp. said his family's four-bedroom colonial home in Haymarket, Va., was appraised at $500,000 several years ago.

Dougherty hopes to refinance two home loans he holds on the house. Dougherty's calculations indicate a lower valuation that would nix the deal he wants, but he has scheduled a home appraisal.

There also are fears that many banks, stung by losses on home loans to subprime borrowers, have adopted lending standards that will be too tough to meet. This is particularly worrisome for those whose credit scores have been hurt by heavy use of credit cards in recent years.

But for owners with good credit, the issue now may be more one of timing.

"I'm definitely interested in refinancing my mortgage, but I wonder if I should wait until after the Fed meeting next week," said Matt Schmidt, a market specialist with Computer Task Group Inc. in Buffalo, N.Y. .

Schmidt noted that the Fed, which holds a two-day meeting starting Tuesday, has signaled it is disposed to further rate cuts that could send mortgage rates still lower. So he doesn't want to refinance too soon if even better rates will be available shortly.