Mortgage loan applications were on the rise in late October as many borrowers apparently decided that rates have stabilized.
Though still off 50% from year-earlier levels, applications jumped 7.6% in the last week of the month, according to the Mortgage Bankers Association's weekly survey. Refinancing activity edged up to 21.2% of total applications, from 21.1% the prior week, but was still far below the nearly 50% level it achieved during much of 1998.
Lenders said the rise in applications indicated the return of homebuyers who had held off on purchases as interest rates surged. One lender, Richard DeAlmeida, a mortgage officer at Citizens-Union Savings Bank in Fall River, Mass., said his customers are flocking back to fixed-rate loans.
The 30-year, fixed-rate loan "is the product of choice right now," he said. Just a month ago, when interest rates were higher, "a good percentage of customers" took adjustable-rate loans, particularly three- or five-year products, Mr. DeAlmeida said. Now customers who "wanted to sit on the fence and see what would happen with rates" are figuring that rates will not drop much below their current level, he said.
The average interest rate for 30-year, fixed-rate mortgages was 7.92% in the last week of October, down from 8.06% the prior week, according to the MBA. Adjustable-rate mortgages averaged 6.98%, up from 6.96%, and adjustable-rate mortgage originations rose to 25.9% of the total, from 24.5%.
Mr. DeAlmeida said the home sale market is heating up to the point where many in the real estate business are complaining that "there are plenty of buyers and not enough homes to sell."
D.C. Aiken, a vice president at HomeBanc Mortgage Corp. in Atlanta, a unit of FT Mortgage Cos., said that about 35% of HomeBanc's origination volume now is in adjustable-rate loans.
For HomeBanc, five- and seven-year adjustable-rate mortgages are the most popular adjustable-rate products, Mr. Aiken said. But borrowers' rate sensitivity is increasing the popularity of loans pegged to the London interbank offered rate, which they see as more stable than the Treasury index.
The Libor-based product offered by HomeBanc, Prime First, was created by Merrill Lynch Credit Corp. A 25-year loan that amortizes after the 10th year, it is suited to young homebuyers in Atlanta who typically refinance before the loan comes due and in the meantime prefer to invest money in equities rather than in principal in their homes, Mr. Aiken said.
The fully indexed rate on the one-month Libor from July 1991 to July 1999 has averaged about 6.75%, Mr. Aiken said, adding that this has translated to lower monthly payments than those on comparable fixed-rate products.
The product also lets homeowners invest in equities or mutual funds rather than tie their money up in a home, where it earns no return, Mr. Aiken said. In lieu of a down payment, most borrowers are required to place equities valued at up to 39% of the loan amount in a pledged-asset account, he said.