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Mortgage rates break record -- again

Should you refinance? With rates this low, it's something to consider, but it's not for everyone.

By Karen Datko Aug 5, 2010 3:21PM

We're starting to sound like a broken record here: For the sixth time in seven weeks, mortgage interest rates have fallen to yet another record low. No one has seen the likes of rates like these since the 1950s, when Dwight Eisenhower was president, June Cleaver cleaned house in a shirtwaist dress, and mortgages typically were for 20 or 25 years.

The average rate for a 30-year fixed loan is 4.49%, according to Freddie Mac's weekly survey, down from 4.54% last week. The average rate for a 15-year fixed is 3.95%, compared with 4% a week ago. (The Associated Press notes that the "rates do not include add-on fees known as points. One point is equal to 1% of the total loan amount. The nationwide fee for loans in Freddie Mac's survey averaged 0.7 point for all loans.")

 

Readjustable-rate mortgages: The average five-year Treasury-indexed hybrid ARM is 3.76% (3.79% last week) and the one-year ARM is 3.64% (3.7%).

 

All are the lowest since Freddie Mac started keeping track in 1971.

 

In normal times, such incredibly low rates would cause a stampede of buyers and refinancers. Reality is less than ground-shaking: Applications to purchase homes rose 1.5% last week, and refinancing increased 1.3%, according to the Mortgage Bankers Association. "The refinance share of mortgage activity remained flat at 78% of total applications from the previous week," the MBA said.

 

It appears that many who can refinance have already done so. And those who can are members of a shrinking group.

 

Generally speaking, refinancing makes sense if you can shave a percentage point or more from your current interest rate, can recoup the refinancing costs within three years, have a credit score of at least 740, have a stable income, and have equity in your home.

Consider:

 

Credit scores in the U.S. continue to drop. A quarter of U.S. consumers with active credit scores have a FICO score of 599 or lower. The AP says:

More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual's score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.

Initial jobless claims increased to 479,000 last week, up 19,000 from the previous week, the U.S. Labor Department said. That's the highest number since April.

 

About a quarter of all mortgaged homes are underwater. If you're significantly underwater -- you owe more on your loan than your house is worth -- you cannot qualify to refinance unless you meet the conditions of the federal government's Home Affordable Refinance Program. (There's rumor of a new program to enable many more people to refinance, but no  facts yet.)

 

Let's say you're in much better shape: excellent credit score, secure job (bless your heart), lots of equity. But, if you've been paying for a while -- say, 10 or 20 years into a 30-year mortgage -- refinancing likely won't make sense.

Kathy Kristof at CBS MoneyWatch explained why that is:

To illustrate, consider somebody with a $300,000 balance on a 5.5% loan that only has 20 more years to go. That balance, amortized over 20 years, would result in monthly mortgage payments of $2,063.66, or $495,278 total.
If this borrower got a new 30-year fixed-rate at 4.6%, his payment would drop to $1,537.93, but he'd be paying an extra 10 years. Total cost: $553,654 -- $58,378 more.

A shorter loan -- 15 or 20 years -- might be beneficial. But once again, you'll have to do the math. You may be better off making extra payments on the loan you have. (That's what I do, cutting the life of my 30-year fixed-rate loan in half.)

Another option for some: If the value of your home has fallen, you could consider a cash-in refinancing, generally used to avoid private mortgage insurance or jumbo loan rates. There are pitfalls, Amy Hoak explains at MarketWatch. Our pal Frank Curmudgeon also wrote about "The mysterious cash-in refinance."

 

Why are mortgage rates so low? American Banking News explains:

Interest rates on mortgages have remained at or near record lows as the market for Treasury notes have rallied and the stock market has remained volatile. Strong demand for Treasury notes pushes interest rates on the notes down, resulting in lower mortgage rates which generally track Treasury yields.

More from MSN Money:

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