By Alan J. Heavens<br />Inquirer Real Estate Writer<br /><br />A positive note in the chorus of bad economic news sounds loudly, like a call to arms. Or, as happened after the Federal Reserve dropped short-term interest rates three-quarters of a percentage point Tuesday, a race to refinance.<br /><br />The refinancing frenzy began right after the Fed’s announcement, local brokers and bankers reported. The 10-year Treasury bond rates on which fixed mortgages are based also fell, and interest rates for 30-year loans plunged as far as 5.125 percent, the lowest level since spring 2004. On Jan. 1, the 30-year fixed rate averaged 6.07 percent; it has ranged between 6 percent and 6.5 percent for two years.<br /><br />Though the number of refinancing applications will not be available until Wednesday from the Mortgage Bankers Association, newspaper and television accounts from Bangor, Maine, to Los Angeles described a boom in activity.<br /><br />On Thursday, when stocks rebounded after agreement on an economic-stimulus package was announced in Washington, the 30-year fixed rate climbed back to 5.75 percent.<br />”Still, it has been insane,” said <strong>Center City mortgage broker Fred Glick</strong>, “because a lot of people didn’t understand that the Fed didn’t cut mortgage rates and thought they had dropped three-quarters of a point.”<br /><br />The mortgage market is as volatile as the stock market, however, so the rate could fall again, he said.<br /><br />By the time it ticked back up Thursday, savvy mortgage shoppers like Michael and Michelle Beachkofsky of Lansdale already had closed a deal.<br /><br />When they began looking for a 30-year fixed mortgage in the summer, the best rate the Beachkofskys could get with zero points was 6.625 percent.<br /><br />Not bad, “but I figured that it would probably drop in the next one to three years and I just needed to keep my eye on it,” said Michael Beachkofsky, 37, who is vice president of a manufacturing company.<br /><br />He jumped on his refinancing shortly after the Fed made its move.<br />”It was done in 24 hours,” Beachkovsky said. His new rate: 5.375 percent with zero points, which will trim the couple’s mortgage payments by $265 a month.<br /><br />Broker Jerome Scarpello of Leo Mortgage in Ambler got the original lender to reduce the Beachkovskys’ loan payoff by the amount of the existing escrow account so their new loan would not be increased by that amount.<br /><br />For the last week or so, Scarpello said, his phone has been ringing off the hook and the chairs in his small office have had no time to cool between applications.<br /><br />”One customer had an option adjustable-rate mortgage from another lender he obtained two years ago,” Scarpello said. “It had to have been a subprime loan because it had a prepayment penalty for the first two years.”<br /><br />After the initial “teaser,” the interest rate rose to 11.95 percent, he said. Refinancing will save that homeowner more than $930 a month.<br /><br />When most mortgages were about $100,000, conventional wisdom dictated that homeowners refinance if they could save 2 percentage points. With many mortgages today totaling $300,000 to $400,000, <strong>Glick said,</strong> you should refinance if you can save $150 a month and roll the cost of the refinancing back into the mortgage.<br /><br />For example, he said, “if you have a $400,000 mortgage at 6.5 percent, the monthly principal and interest payments would be $2,528.<br /><br />”If you refinanced to 5.5 percent, it’s $2,271 and a savings of about $250 . . . enough for a couple of nice dinners out.”<br /><br />Declining interest rates aren’t such good news for everyone, though. The lowest rates, <strong>Glick said</strong>, are for people “with loan-to-value ratios under 70 percent. When the LTVs are above 70 percent, Fannie Mae and Freddie Mac begin adding on points.”<br /><br />(The loan-to-value ratio is the amount being borrowed relative to the value of the house.)<br />Long-term rates began increasing again Thursday as the stock market rallied and investors headed back from the safe haven of bonds.<br /><br />”Mortgage rates behave very much like stock prices,” <strong>Glick said</strong>. “When 10-year Treasury yields dropped after the Fed lowered the rate, I was offering rates as low as 5.125 percent with no points. On Thursday, after stocks rallied, the rate was back to 5 3/4.<br /><br />Depending on what kind of mortgage they’re stuck with, declining rates may not help a lot of subprime borrowers.<br /><br />Patricia Alber, 50, and her husband, Benjamin, 58, were able to buy a house in Bensalem in 2001 with a subprime adjustable-rate mortgage (ARM) of 8 percent.<br />A now-defunct mortgage broker promised to lower the ARM because of the Albers’ prompt payment history.<br /><br />But “when we showed up,” Patricia Alber said, “the rate was 10.5 percent, and our monthly payment zoomed to $2,700.” That far exceeds her husband’s income as a public-works employee and her Social Security disability income.<br /><br />”Just to make payments, we had to borrow money,” she said.<br /><br />Peter Buchsbaum of Arlington Capital Mortgage got the Albers a Federal Housing Administration loan that would save them $650 a month.<br /><br />”But there is a glitch,” he said. “The Texas company that services their mortgage will not let them out of the $11,000 prepayment penalty. They will shortly join the ranks of too many people who will lose their houses because of some other person’s greed.”<br /><br />When Jay Stillman, 40, bought his Mount Laurel house several years ago, he opted for an adjustable rate of 1.95 percent.<br /><br />It was a Pick A Pay mortgage – a cash-flow ARM that comes with four payment options: minimum, interest-only, fully amortizing, and a five-year fixed monthly payment. The mortgage was ideal for someone in sales whose monthly income changes.<br />Four years ago, as the teaser rate began rising, Stillman “locked into a 6.8 percent rate for a nominal fee.”<br /><br />Now, with what he said was about 50 percent equity in his house in a neighborhood that has gained substantially in value since he bought, he is refinancing into a 30-year fixed mortgage with an annual percentage rate of 5.375 percent.<br /><br />”I had considered a 15-year fixed rate, but my accountant said I should look at the house as an investment and not pay the mortgage off more quickly,” Stillman said.<br />Keeping your finances in order “is like exercise – you have to keep working at it,” said Beachkofsky, the Lansdale homeowner.<br /><br />When he and his wife bought their first house in Lower Gwynedd seven years ago, they opted for an ARM “because we knew we’d be out before the teaser rate of 5.25 percent adjusted. The ARM at that low rate was a better fit than a 30-year fixed at a much higher rate.”<br />For his current house, Beachkofsky is relieved that he was able to catch the lower rate just in time.<br /><br />”I just wish I was as disciplined with exercising as I am with finance,” he said.