Refinancings Expected To Surge In 2007
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(As 2006 is drawing to a close, we begin to wonder what 2007 will hold, especially for the unpredictable and volatile housing and mortgage industries. )
As thousands of adjustable rate mortgages are set to adjust in the next few months, many analysts and professionals are predicting a boom in the refinancing side of the mortgage industry.
Borrowers who took out these loans are going to have trouble making monthly payments once they increase, so many are going to have to refinance in order to keep their house and continue making their monthly payments.
A November 1, 2006 article by Holden Lewis of Bankrate.com, “Year in review: Refinancing,” looks at the refinancing events of the past year and what is expected to occur in 2007.
“2007 will bring an unusual refinancing boom as hundreds of thousands of borrowers bail out of their adjustable-rate mortgages while the getting is good. On top of that, sellers and buyers will grapple with stagnant or falling house prices in some markets. And it's anyone's guess what course the Federal Reserve will take.”
So although no one knows exactly what is going to happen, things are not looking too bright for these two linked markets; being housing and mortgages.
“Like the twin strands in a DNA helix, house prices are intertwined with the fate of adjustable-rate mortgages, or ARMs. That's especially true for two types of adjustables: interest-only mortgages and a subset called pay-option ARMs. The main appeal of these nontraditional mortgages is that they have extra-low monthly payments, allowing people to buy more house than they otherwise could afford. That benefit brings a trade-off: borrowers build up equity slowly or, in some cases, actually lose equity in the house with every monthly payment.”
The housing boom from about 2000 to 2005 caused many people to get into mortgages they really couldn’t afford, but they could not qualify for more traditional loans.
“In a self-reinforcing cycle, rapidly rising house prices pushed buyers into getting pay-option and interest-only ARMs, while the popularity of these loans sent house prices even higher. Definitive estimates of the popularity of nontraditional mortgages are hard to come by, but it is believed that in some markets, especially in coastal California, around half or even more of new home buyers took out interest-only or pay-option ARMs in 2005 and 2006.”
Although these types of mortgages are great for a variety of different people, they are not appropriate for buyers who do not fully understand them or do not have the income to pay the payments when the rates adjust.
“Mortgage bankers believe a steady influx of homeowners will refinance their nontraditional mortgages into something less exotic in 2007. A lot of them will refinance into 30-year, fixed-rate mortgages. Others will get hybrid ARMs, such as the 5/1 ARM, which has a relatively low introductory rate that lasts for five years, then adjusts annually thereafter. Hybrid ARMs are popular among people who expect to sell their houses within a few years.”
These refinancings should help the mortgage industry recover from its hit during the housing market’s decline, as well as assist individual home owners with making payments.
