Homeowners are being tempted to refinance their mortgages as the nation’s struggling economy produces the lowest interest rates in nearly a half-century.
The latest drop in rates resulted from the Federal Reserve’s attempts this week to spare the nation from what economists say could be the worst recession in decades.
The Fed cut the federal funds rate Tuesday from 1 percent to a target range of zero to 0.25 percent.
The federal funds rate is the interest rate that banks charge each other for loans, usually overnight.
Lower rates for them are spilling over into lower rates for their customers, which most often means the nation’s homeowners.
On Wednesday, some mortgage brokers were quoting mortgage rates near 4.5 percent for borrowers with good credit who make large down payments.
Applications for refinancing are “up significantly,” said Tim Wilson, president of mortgage business for real estate giant Long & Foster Companies. “Once there’s a 1 percent change, you see a lot of activity.”
Lower interest rates are likely to help pull slow home sales out of their slump of recent months, he said.
“You’ll definitely see a pick-up,” he said. “Low housing prices plus the combination of low [interest] rates will get it going.”
Mortgage application volume jumped last week, fueled by borrowers seizing on lower rates to refinance home loans, the Mortgage Bankers Association said Wednesday.
The trade group’s seasonally adjusted application index rose 2.9 percent to 841.4 in the week ended Dec 12. The index stood at a revised 817.7 a week earlier.
The national average rate on 30-year, fixed mortgages was 5.06 percent on Wednesday, according to financial publisher HSH Associates. It is the lowest since the 1960s and down from 5.3 percent Tuesday.
However, personal finance experts warn that refinancing is not for all homeowners, only the ones with good credit ratings who plan to stay in their homes long enough to recover their refinancing charges.
Closing costs are averaging around $2,100 when appraisals, title examination and other fees are calculated into the refinanced loan, according to industry estimates.
“You really have to be savvy to know what it’s going to cost you,” said Nancy Porter, a personal finance professor at South Carolina’s Clemson University.
She recommends dividing refinancing costs by the monthly savings from the lower interest rate on a refinanced loan to determine how long it would take to recover the costs.
A savings of $100 per month, for example, would take 21 months to recover refinancing costs of $2,100.
“If they know they’re going to be changing jobs in a year, then they’re not going to recoup those costs,” Mrs. Porter said.
A bad credit rating from more credit card debt also could undercut the advantages of refinancing by preventing borrowers from getting the best interest rates, she said.
Residents of the Washington area stand a better chance of refinancing successfully than most regions, according to real estate agents.
Because of the federal government’s huge presence in Washington, “The jobs are more stable here,” said Fritz Hubig, a real estate agent.
Lower interest rates offer the best news 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.”
Analysts say the Fed’s moves to buy up mortgage debt are designed to reduce an unusually large difference, or spread, between mortgage rates and yields on government debt.
In recent years, there has been about a 1.8 percentage point difference between the yield on a 10-year Treasury note and 30-year mortgage rates, but gap currently hovers around three percentage points. The 10-year note currently yields 2.07 percent.
“Thus, mortgage rates have declined further,” said Orawin Velz, a Mortgage Bankers Association economist.
Falling interest rates mean Americans could suddenly find billions of extra dollars in their pockets at a time when consumers have sharply cut back on spending amid rising unemployment and declining household wealth. But many experts believe that the interest rate cuts alone won’t be enough to jump-start the economy.
“It’s a tall order to get (people) to go out and spend again,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “That’s why you also need a stimulus.” President-elect Barack Obama’s advisers are currently contemplating an economic recovery plan that could cost as much as $1 trillion over two years.
Please read our comment policy before commenting.