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IS TIME RUNNING OUT? WITH HOME INTEREST RATES EXPECTED TO RISE BY THE END OF THE YEAR, HOMEOWNERS NEED TO START THINKING ABOUT REFINANCING.

Byline: Barbara Correa Staff Writer

Southern California homeowners who have dragged their feet about refinancing may find they are late to the party - at least without paying higher rates and facing costlier rules.

The Mortgage Bankers Association of America is forecasting that 30-year fixed rates will end the year at least half a percentage point higher than they were at the beginning of 2003. Consequently, it also sees refinancing transactions dropping to 33 percent of total mortgages, down from 71 percent in the first quarter.

In addition, lenders are beginning to phase in new rules that add to the cost of ``cash-out'' refinancing - transactions involving a larger loan, part of which is channeled to the homeowner in cash.

With interest rates hovering at 5.8 percent, however, such loans will continue to make financial sense for most consumers, even with the new fees and rate increases.

``There's very little resistance to paying one-eighth more in interest rates. People still need the money, so it's not a disincentive right now,'' said Fred Arnold, vice president of the Southern California unit of American Family Funding in Santa Clarita.

Refinancing has been credited with saving the nation's economy in the last several years, when homeowners took out billions of dollars of equity in their homes in cash and poured the money into home remodeling, car purchases, college funding and paying down credit-card debt.

But where consumers saw a chance to convert home price appreciation into disposable income, loan guarantors Freddie Mac and Fannie Mae saw higher-risk mortgages.

In a market like Southern California, where home prices have soared so high so quickly, the risk is even greater, as owners have taken out ``refi'' loans for the total value of a home - or more.

In an effort to cool the cash-out mania, the two loan investors added fees earlier this year on cash-out refis that add up to an increase of about one-eighth of 1 percent, according to bankers.

So far, the move hasn't killed demand for cash from most, though it can be a deal breaker for low- or moderate-income homeowners.

``If you have a half-million-dollar house, a (half) quarter point is not as much as for someone with a $150,000 house,'' said Jaime Gonzalez, senior loan officer at Sterling Capital Mortgage in Ontario.

A lot of the money homeowners have taken out on the equity in their houses has gone to paying off other debts.

``In terms of overall indebtedness I think it's been a positive,'' said Celia Chen, a housing economics analyst director at research firm Economy.com. Part of the refi money is being used to pay down debt, and part is going to spending - mostly responsible spending.

``I don't think people are buying second homes or Porsches.''

Risks of refi

Bankers worry about refi customers who take out the cash, pay down their credit cards but continue to spend, creating a debt bubble without the safety net of home equity the next time.

``Most of the time, when people take out cash to pay off debts, within two years they have a tendency to take on additional debt. It's like breaking a bad habit,'' said Fred Arnold.

And one that refinancing opportunities reinforce in some cases.

Steve Linnin, a mortgage broker at costlessmortgage.com in Glendora, recalled a couple who kept on spending after cash-out refinancing allowed for upgrading to a larger house.

The couple refinanced their home in Fontana in 1999, taking out cash on a 30-year loan to pay off all their consumer debt.

About 10 months ago, they decided to use their equity gains in the house to upgrade to a larger home in Moreno Valley. At the time, their loan represented about 55 percent of the home's value.

Two months ago, the couple called back to request another refi to take out cash to again consolidate debts, including a car payment. That refi ramped the mortgage up to a 78 percent loan-to-value ratio.

``It's a vicious cycle. People can't control their spending,'' said Paul Pound of Amerihome Mortgage in San Bernardino.

For those who can, however, the refi boom has presented the opportunity to cut loan terms by half, the trend Pound said he's seeing most these days.

Rates rising

The other trend brokers report is an increase in second mortgages and a shift to larger seconds, which are typically structured as a line of credit and therefore vulnerable to rising interest rates.

What's happening is that home purchases are increasingly being made using a first and second mortgage for a ``combo'' loan.

``I'm seeing the trend because of the new rules but also because of higher values,'' said Jaime Gonzalez of Sterling Capital. ``I'm seeing more and more clients who are qualifiable but they don't have enough savings to purchase a home. This is a new tool to stimulate sales.''

The problem is that second mortgages as lines of credit are being sold as a balance to fixed mortgages, which incur a fee if they are paid off early. When interest rates begin rising, which they are forecast to do, those payments will rise, too.

``Human nature is such that people don't pay down their equity lines,'' said Ted Grose, president of the California Association of Mortgage Brokers. ``In the short term, the average consumer's motivation for refi is pretty sound. In the long term, human nature being what it is, we're going to see the consequences.''

What homeowners need to do is outline specific goals for cash-out refi money, such as exactly what they plan to do with the funds, said Allen Bond, a mortgage broker at Palos Verdes Funding.

He said it's tough to make generalizations when every individual's finances are so different.

For some, a second-mortgage line of credit works because they will have the means to pay it off, whereas establishing a second-mortgage line of credit for someone who wants to spend 30 years paying it off clearly isn't the best plan.

The watchword is planning.

``I don't believe the wave of (refinancing) in the last few years will bring on economic disaster. It's really saved our bacon economically,'' said Grose.

``But the average person is up against the wall in their personal debt. Mortgages are being used to restructure debt and improve lifestyle but not for savings. In the long term we have to pay our bills.''

Barbara Correa, (818) 713-3634

barbara.correa(at)dailynews.com

CAPTION(S):

chart, drawing

Chart:

REFINANCE SHARE

SOURCE: Mortgage Bankers Association of America

Daily News

Drawing:

(color) no caption (Sand Timer, home, money)

Warren Huskey/Staff Artist
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Title Annotation:Business
Publication:Daily News (Los Angeles, CA)
Article Type:Statistical Data Included
Date:May 18, 2003
Words:1095
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