Thanks to Fed Chairman Ben Bernanke, mortgage interest rates are now at their lowest point since anyone’s been keeping records.
Since the beginning of this month, just before the Federal Reserve said it would try to stimulate the economy in part with large purchases of mortgage-backed securities, interest rates for home loans have fallen every week. This has prompted many homeowners to run to their lenders to try to refinance.
“We’re at a very robust level of activity,” says Mike Fratantoni, vice president of research at the Mortgage Bankers Association (MBA) in Washington. “We are back up to a three-year high in the level of refinance applications.”
The interest rate on a 30-year, fixed-rate conforming mortgage (under $417,500) dipped to 3.63 percent last week, compared with 3.78 percent at the end of August, the MBA said Wednesday. For jumbo loans (more than $417,500), interest rates fell a comparable amount and are now at 3.87 percent.
The last time refinance activity was this high was in early 2009, when interest rates fell even faster. Back then, mortgage rates dropped from 5.5 to 5 percent.
However, new home buyers and people moving up to larger homes are not entering the market in large numbers, says Mr. Fratantoni.
“People are still looking at the 8.1 percent unemployment rate, and they still don’t feel a level of stability in the economy,” he says.
If interest rates were to continue to fall, they could help create jobs, says economist Mark Zandi of Moody’s Analytics in West Chester, Pa. A sustained decline of half a point in fixed mortgage rates would add just under a quarter of a percentage point to real GDP growth in the subsequent year, he estimates.
“This translates into about 175,000 jobs and lowers unemployment” by about one-tenth of a percentage point, he writes in an e-mail. “This is a meaningful boost to the economy, but it’s not enough to solve what ails the economy.”
For those who qualify, the savings from a refinancing can be helpful in freeing up money to buy other things or pay off other loans. A homeowner with a $200,000, 30-year, fixed-rate loan would save about $55 a month if he or she went from a 4 percent mortgage to a 3.5 percent mortgage, Fratantoni says.
“There are people who have refinanced three times starting at 5 percent and are now down to 3.5 percent, and that is a significant monthly savings,” he says.
According to the MBA, some 81 percent of the loans made last week were refinancings. That is close to the all-time record of 85 percent in January 2009.
“I’m telling my clients that if you are thinking of refinancing, this is as good a time as any,” says David Shucavage, president of Carolina Estate Planners in Wilmington, N.C. “It’s such cheap money that 10 years from now, you will be happily telling your grandchildren you borrowed money at 3.63 percent.”
Factoring in the inflation rate, which is about 2 percent annualized, mortgage rates seem extremely low. For example, the 15-year, fixed-rate loan is down to 2.98 percent. “The real interest rate on this loan is about 1 percent,” says Ann Owen, a professor at Hamilton College in Clinton, N.Y., and a former economist at the Federal Reserve.
“Obviously, there is a limit to how far mortgage rates can fall,” she adds.
One factor that could make home borrowing rates rise would be a much greater demand for housing and mortgages, Ms. Owen says. “Most likely that would coincide with the Fed pulling back, since it would be a sign the economy is picking up,” she says. “But the housing market is in such bad shape that it has a long way to go before it’s in full recovery.”
Sales of new single-family homes fell 0.3 percent in August compared with July, the Commerce Department reported Wednesday. At the same time, compared with a year ago, the median price of a new home rose 17 percent, the largest rise since December 2004, when the housing market was bubbling.
Other recent data also show gains, with new home starts up 29 percent compared with a year ago and permits up 24 percent compared with last year.
In Wilmington, Mr. Shucavage says, housing starts jumped two months ago. “We’re back to the same level we were in 2007,” he says. “We have seen a distinct uptick in new housing applications. Mortgage rates must have something to do with that.”
Although mortgage rates are low, not everyone will qualify for refinancing, Owen points out. “There is still evidence credit standards are pretty tight,” she says.
About 20 percent of the refinancings involve people whose homes are worth less than their mortgages. They have qualified for the Home Affordable Refinance Program (HARP), a government program run through Fannie Mae and Freddie Mac. These individuals have a good credit record, a Fannie or Freddie loan, and a job. “If you have weaker credit, it is much tougher to qualify,” says Fratantoni.