Christmas list addition: refinance

Tony Jabon had an e-mail in to his mortgage broker by 10 a.m.

The 35-year-old environmental consultant in Charlotte, N.C., had heard about the Federal Reserve's decision to cut its key interest rate to nearly zero and wanted to refinance to something lower than 5.5 percent.

Within hours, he had locked in a rate of about 4.6 percent. He'll save about $160 on his monthly payment. "Any time you can save a dollar," he said, "Why not?"

Homeowners across the country did the same Wednesday. Mortgage brokers reported a surge of calls from borrowers seeking to take advantage of the Fed's extraordinary decision. Some brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments.

The national average rate on 30-year, fixed mortgages was 5.06 percent on Wednesday, according to financial publisher HSH Associates -- the lowest since the 1960s and down from 5.3 percent Tuesday.

But local mortgage companies didn't report a Wednesday surge in applications.

For Warren Chaney, a loan officer at Vision Home Mortgage in Las Vegas, the uptick in business began a week ago, when his typical daily volume of calls more than doubled.

In fact, calls slackened a bit Wednesday, as mortgage rates jumped from 5.5 percent to 5.875 percent. The best of the rate offers peaked Tuesday, Chaney said.

Chaney said banks had expected the Fed's decision, and they began building those expectations into their interest rates last week.

Nor did Clay Duncan, president of Las Vegas-based Southern Fidelity Mortgage, report higher application volumes Wednesday. The Fed's short-term overnight lending rate has little effect on mortgage interest rates anyway, Duncan noted.

What Duncan reported instead was a big boost in Southern Fidelity's closings, which have increased 50 percent in December when compared to other monthly averages throughout the rest of 2008.

"We're breaking our records," Duncan said. "Business is really, really good."

The improved closings could be the result of increased manpower handling short sales at banks, Duncan said.

Though the Fed's rate cut didn't generate more leads for Southern Fidelity, that could change in coming weeks.

Some economists and analysts say interest rates on mortgage loans could drop to 3.5 percent, Duncan said, and he believes interest charges could plummet to 4.5 percent if they stay on their current path. Those low rates would help homeowners who locked in higher loan costs refinance into a cheaper mortgage, in turn freeing up cash for discretionary spending. He speculated that he'd have to hire people "like crazy" to keep up with demand if rates go that low.

"Lower mortgage rates would definitely be a stimulus package in and of themselves," Duncan said.

Still, other mortgage brokers around the country say they've seen evidence of a mortgage-induced stimulus already.

"This is beautiful, oh my gosh!" said Patti Mazzara, a mortgage broker in the Minneapolis suburb of Edina, who was surprised when she looked up rates and found them well below 5 percent, down at least three-quarters of a percentage point from earlier in the week. "This is a whole new game now. Hopefully it's going to give people some relief."

The Fed, aiming to free up lending and jolt the economy back to life, cut the federal funds rate Tuesday from 1 percent to a target range of zero to 0.25 percent and pledged to keep funneling money into the market for mortgage investments.

It was the best news in months for anyone looking to lock in a 30-year, fixed-rate mortgage. But it was not expected to be a cure-all, and borrowers already in danger of foreclosure probably won't be able to take advantage.

"It's a call to action for homeowners looking to get out of adjustable-rate mortgages," said Greg McBride, senior financial analyst at Bankrate.com. "Unfortunately, it's not an equal-opportunity party."

An estimated 12 million Americans owe more on their home loans than their houses' current value, unemployment is still rising quickly, and foreclosures are soaring.

For people whose home values have plunged, "I could have a 1 percent interest rate, but it wouldn't help them," said Michael Maynard, a mortgage broker in Branford, Conn.

"People losing their homes aren't losing their homes because they can't get a 6 percent mortgage," Maynard said. "They're not qualifying at all."

In Charlotte, Jabon's mortgage broker, Will Mullinix, said that while rates that low are "pretty unprecedented," the best deals are available only to borrowers with pristine credit who are taking out loans for under 80 percent of their house's current value.

"All the stars have to align," Mullinix said.

And economists expect falling rates to provide only a modest boost to home sales, especially as unemployment worsens amid what could be the longest economic downturn since the Great Depression.

"People tend to be more inclined to buy a house when they're confident about their employment and income prospects," Wachovia Corp. economist Mark Vitner said.

Besides lowering the interest on fixed-rate mortgages, rates should come down on adjustable-rate home equity loans. Those are tied to the prime rate, and prime rates came down immediately after the Fed move Tuesday.

The Federal Reserve also plans to buy up mortgage debt and is considering buying long-term Treasury bonds that are closely tied to mortgage rates, so analysts expect rates to drop even further.

"We're going to see just a massive refinancing boom," said Mark Zandi, chief economist at Moody's Economy.com, who estimates that up to 10 million U.S. borrowers, or about one in five Americans with a mortgage, could wind up refinancing.

Review-Journal writer Jennifer Robison contributed to this report.