May 27th, 2010 7:17 PM by Narbik Karamian
By Sue McAllister
smcallister@mercurynews.com
Home loan rates below 5 percent, their lowest level of the year, are fueling a refinancing boom.
"I've been flooded with phone calls," said Campbell mortgage broker Rob McCarthy of 101Loan.
A report from mortgage financing company Freddie Mac said average rates for 30-year, fixed-rate loans sank to 4.78 percent for the week ending Thursday. That was down from 4.84 percent the previous week, and just a smidgen above the record low of 4.71 percent set in December.
"Nobody ever thought they'd see a rate with a 4 in front of it again, but here we are," said Faramarz Moeen-Ziai of Bank of Commerce Mortgage, headquartered in San Ramon.
Just as they did five months ago, brokers say homeowners should jump at the low rates — including those who have seen their equity increase with rising home prices — noting the market is "volatile," changing frequently with investors' fears and hopes for the economy.
Concerns about serious debt problems in Greece, Spain and Portugal have driven investors out of stocks and into the relative safety of bonds in recent weeks, pushing bond yields down. Mortgage rates, which tend to mirror the direction of long-term bond yields, have followed suit.
But that trend may be short-lived. As the stock market rose strongly Thursday on news that China does not plan to sell off the European debt it holds, for example, mortgage rates edged up by a quarter
percentage point or more.
"The more the recovery talk gains steam, the more pressure on rates to go up, because money leaves bonds and goes to stocks," Moeen-Ziai said.
Greg McBride, senior financial analyst at Bankrate.com, said he expects rates to remain close to the 5 percent mark for the first half of the summer. "But continued improvement in the U.S. economy will ultimately mean higher mortgage rates, but it will be a little bit later in the year than we had expected," he said.
In the meantime, Bay Area loan brokers are busy trying to lock in rock-bottom rates for clients. McCarthy said his office has been submitting about 15 loan applications to lenders a day in the past few days, up from a more typical two or three a day.
And broker Narbik Karamian, a board member of the Silicon Valley chapter of the California Association of Mortgage Professionals, said several clients who had been waiting for sub-5-percent rates locked in loans at 4.875 percent interest this week.
One of them was San Jose homeowner Khurram Zafar, who on Tuesday completed an application for what will be his second refinancing since buying his home in early 2008. The new loan will bring his interest rate from 5.125 percent down to 4.875 percent. "I really wanted something in the 4 percent range," he said, noting that his monthly payments will drop by about $100. "It's the equivalent of getting a fat utility bill eliminated per month."
A report earlier this week from the Mortgage Bankers Association indicated that loan applications from refinancing homeowners like Zafar outnumber those from people trying to buy homes. Refinance applications rose 17 percent last week from the previous week to their highest level since October, and made up 72 percent of all applications, the bankers group said.
With home prices rising slightly in some pockets of the Bay Area this year, more homeowners have enough equity to be eligible to refinance their loans, brokers said. Most lenders require owners to have 15 or 20 percent equity in their homes in order to qualify for a refinance, Karamian said. Median values of all Santa Clara County homes rose an estimated 1.6 percent in the first quarter compared with a year earlier, according to real estate information company Zillow, for example.
"The home price is critical to the ability of homeowners to refinance, because for many, their equity had been completely erased by falling prices" over the past few years, McBride said.
Applications to buy homes, however, fell 3 percent from the previous week, reaching the lowest level since April 1997.
Industry observers say much of the fall-off in purchase applications is because many people who hoped to buy homes hurried to make deals prior to April 30, which was the cutoff date to receive a federal income tax credit for home purchases.