How Low Can We Go?
The amazing drop in interest rates and its impact on local homeowners.
Interest rates are at a nearly unprecedented all-time low. What does this mean for homeowners either thinking about buying a new home or refinancing the one they're living in today?
Scotty Ball, a real estate attorney specializing in residential and commercial real estate law with the Gainesville, Ga.-based law firm Stewart Melvin & Frost, can help you better understand the dramatic changes in the mortgage industry and how they're impacting our community.
Question: Are we seeing the lowest mortgage rates ever?
Scotty: We're experiencing all-time low. Rates are now at 4½ percent on 30-year fixed, even lower on 15-year. I thought 2003 was lowest we would ever see rates go. But I was wrong.
Question: What happened?
Scotty: A big factor was recent financial crisis in Greece and other parts of Europe. That caused foreign investors to rush to invest in the relative safety of U.S. Treasury bonds which in turn pushed down U.S. interest rates.
This was a big surprise. U.S. government had stopped buying Treasury bonds. We also have undergone collapse of U.S. housing market and tremendous number of loan defaults - factors that left questions in my mind about where interest rates would go.
Question: As a real estate attorney, you are on the front lines of the mortgage market. What activity are you seeing as a result of this low-interest rate environment?
Scotty: We already had experienced a very busy spring this year - driven by the federal tax credits for first-time homebuyers as well as low interest rates. Home-buying activity had peaked just after the tax credits expired in mid-April. Now it's definitely picking back up, particularly with homes valued at $200,000 and less.
We're still not seeing as much activity in higher-priced home market. This is likely due to the fact that there is a cap on conventional loans for more expensive homes. For mortgages of $417,000 and higher, the interest rates are higher. That is a byproduct of stiffer regulations in the loan industry.
Question: How has this low interest rate environment affected a homebuyer's decision between a fixed-rate mortgage or an adjustable-rate mortgage?
Scotty: I'm seeing a huge drop-off in adjustable-rate mortgages. The interest-rate margin between a fixed and adjustable is so small that it hardly makes sense to choose an adjustable. It is much wiser to go with a fixed mortgage payment.
Question: What are you experiencing in the home refinancing market?
Scotty: There is a tremendous amount of activity. I'm closing about two refinancings for every one home purchase. The recession has awakened people to the perils of frivolous spending and focused more of us toward reducing our personal debt.
Question: What is the best advice for making a decision to refinance your home?
Scotty: The old rule was at least two interest points below your existing mortgage rate. But new rule is to consider refinancing if there is at least a one-percent spread. The reason is closing costs are much lower than they used to be.
The best way to make refinancing decision is to follow this simple equation: Calculate your costs to refinance (usually about 3% of the overall loan). Then compare that figure with your savings. You should be able to recoup your costs within five years.
So, if you think you might plan to move in a couple of years, refinancing your home probably is not a good idea. When considering a refinancing, remember it's just as important to look at reducing your term. So, homeowners should definitely look at shorter-term loans such as a 15-year mortgage - which can save tens of thousands of dollars over the life of the loan.
Question: With the tougher banking regulations in place, how difficult is it for someone to refinance?
Scotty: Lenders have definitely tightened up their underwriting. Credit scores are more important than ever and scrutinized closely. Appraisals in this housing market are another big problem. Lenders require a certain loan-to-value ratio (90% ceiling) before approving a loan or refinancing. I've see many refinancings fall through because the applicant's home value had fallen so low that they couldn't come up with the money to replace the shortfall and meet the loan-to-value percentages required by the lender.
Question: Can you give a quick update on the foreclosure market - is it beginning to slow down here in the Northeast Georgia area?
Scotty: Unfortunately, no. It's holding at about the same level. I see the pace of foreclosure activity continuing for the next two years before it all sorts out. It's going to take a while for banks to sell their foreclosed properties. Once it does, then we'll begin to see some normalcy return to the home-buying market.
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