WASHINGTON — With mortgage interest rates setting record lows almost every week for more than two months, two questions naturally come to mind: How low can they go? And should I refinance — again?
Last week rates fell to levels that many people in the mortgage business thought they would never see. Freddie Mac reported Thursday that the average rate on a 30-year, fixed-rate loan was 4.44 percent, with 0.7 of a point in prepaid interest. (One point equals 1 percent of the loan amount.) Loans fixed for 15 years also hit a record low, 3.92 percent, with 0.6 of a point, on average.
Loans that are fixed for five years and then convert to annual interest-rate adjustments averaged 3.56 percent last week. One-year adjustables averaged 3.53 percent. Both charged an average of 0.7 of a point, according to Freddie Mac.
Frank Nothaft, Freddie Mac’s chief economist, said in a report issued last week: “The ability to lock in a principal and interest payment at below 5 percent for 30 years is rare enough. The fact that a 30-year, fixed-rate mortgage can be obtained for 4.5 percent, or a 15-year mortgage for 4 percent is an amazing opportunity for borrowers.’’
However, Greg McBride, senior financial analyst for Bankrate.com
, said: “The pool of refi candidates has been dwindling because we have been below 5 1/2 percent for the past year. People may not want to invest the time and money in another go-round.’’
He added that, in markets where values are still declining, an appraisal that was high enough to support a refinance just eight months ago may not be at the same value now.
Homeowners should not assume that they wouldn’t qualify for a new loan, said Malcolm Hollensteiner, mid-Atlantic regional manager for PNC Mortgage.
“There’s a large percentage of the population that doesn’t feel they are eligible to refinance, but they are,’’ he said. “Until you go through the process, you don’t know if you do.’’
Rates are higher on jumbo loans for amounts greater than $729,750, which are too big to be eligible for purchase by Freddie Mac and Fannie Mae. But the spread between jumbos and smaller “conforming’’ loans has narrowed significantly this year, Hollensteiner said. He said borrowers have to pay interest rates of about half to three-quarters of a percentage point more for jumbos. A year ago the difference was about 1 to 1.5 percentage points.
Refinancings now constitute most of the mortgage market, accounting for 78 percent of all loan applications nationwide, the Mortgage Bankers Association reported this week. And many refinancers are taking the opportunity to move into shorter-term loans that carry a lower interest rate and build equity faster. That’s a particularly attractive option for people who hope to pay off their mortgage before retirement.
Economists at Freddie Mac reported last week that during the second quarter, 30 percent of borrowers who were refinancing out of 30-year, fixed-rate loans chose new fixed-rate loans lasting 15 or 20 years. That’s the highest level of term-shortening the company has seen in six years. But other borrowers, Hollensteiner said, “are more focused on lowering their monthly payments.’’ And a significant number are pulling out equity when they refinance, using the cash to pay for home improvements or education expenses, he said.
Unless you had a high rate to begin with (say 6.5 percent or more) switching to a shorter-term loan boosts the monthly payment but can save a lot of money over the duration of the loan. For a $200,000 loan, switching from a 30-year rate at 5 percent to a 15-year loan fixed at 3.92 percent would increase the monthly payment by about $400 per month. But by paying off the loan in half the time, you would save about $122,000.
But refinancing isn’t free, even if the lender offers to roll over the expense into your new loan balance. Hollensteiner said nonrecoverable closing costs, such as loan application fees or government recordation fees, are typically about 1 percent of the loan amount. Depending on variables such as the day of the month you close on the new loan, you could have to come up with a similar amount in expenses that you will recover after closing, say from a disbursement from your old escrow account. These expenses include property tax payments and daily interest expenses.
“It’s all a wash, but it’s still money you need to have at closing,’’ Hollensteiner said.
Might rates go even lower? Perhaps, but probably not by much, according to Celia Chen, senior director at Moody’s Analytics. “I don’t think they’re going to fall much further; they’re at a record right now,’’ she said. “And even at this low rate, it doesn’t seem to be doing much to support the housing market.’’
And though it’s remarkable to note how many weeks in a row Freddie Mac’s mortgage rate series has marked record lows (seven times in the past eight weeks), the week-to-week changes have been tiny, usually only one hundredth or two hundredths of a percentage point at a time. Chen said she expects mortgage interest trends to remain “fairly stable at a low rate.”