Homeowners Rush to Refinance at Record Low Interest Rates

Housing downturn sees no end as majority of new loan applications are for refinance.
The Mortgage Bankers Association (MBA) reported today that mortgage loan application volume was up 15.8% from the previous week, on a seasonally adjusted basis.

This measure of the Market Composite Index was for the week ending January 9, 2009. On an unadjusted basis, the index rose 95.7% from the previous week.

But while the number of mortgage applications rose, the vast majority - over 85% - were for homeowners looking to refinance their current mortgage. The Refinance Index increased by 25.6% from the previous week, at its highest level since June 2003.

The MBA survey figures confirm that prospective home-buyers are waiting out the decline in the real estate market, hoping to get a better price later as housing in many areas of the country is still expected to fall further. The seasonally adjusted Purchase Index decreased 14.1% from the week before.

For sellers with a house on the market, it doesn't look good.

Historically low mortgage rates draw homeowners hoping to save over their current mortgage payments.
The mad rush to refinance has been spurred by the lowest mortgage interest rates since the MBA began keeping track in 1990. The average contract interest rate in the first full week of January 2009 was 4.89% for thirty-year, fixed-rate mortgages with an 80% loan-to-value (LTV) ratio, slightly under the previous record low of 4.99% when the Refinance Index reached its earlier highs back in June 2003.

Refinancing now may be the answer many current homeowners are looking for to reduce their monthly expenses in this difficult economy. For a $200,000 mortgage, the difference between a 4.89% interest rate and a 5.89% interest rate saves $125 on the monthly house payment - and $44,912 over the course of thirty years of payments.

It's important to do the math and find the break-even point if you're considering a refinance; the expense of closing costs on the new loan means the homeowner will have to stay put for a few years to recoup those costs before the lower rate begins to pay for itself. But staying put may be the easy part as the housing market is expected to remain weak through much of 2010, or possibly much longer according to some experts.

A bigger concern for homeowners, who've purchased just in the past few years with little or no down payment, is that they are likely to find that much of their home equity - if not all - has been wiped out in the housing downturn.

Recent no-down-payment buyers who live in the hardest hits areas of the country are even likely to be upside down on their mortgage - owing more than their house is worth. For homeowners in these situations, refinancing may not be a viable option. Generally, an 80% LTV ratio is needed to get the best rates.

Also, those historically low rates are limited to borrowers with great credit scores. While the once-frozen credit market is beginning to thaw, lenders are much more careful about taking risks than they were in the heyday of easy home financing.

And with banks reining in credit limits on personal loans and credit cards, thereby increasing the consumer's balance-to-limit ratio, some borrowers will find that their credit scores have decreased since they closed on their original mortgage, putting a low-interest refinance out of reach.


Source:
Mortgage Bankers Association