Mortgage rates spark refi frenzy

The recent financial turmoil has had one positive outcome: Mortgage rates have dropped yet again, sparking a surge in refinancing.

The average rate on a 30-year fixed-rate mortgage fell to 4.32% in the week ending today, the lowest average rate so far this year, according to Freddie Mac's weekly survey. The interest rates for 15-year mortgages (3.50%) and five-year (3.13%) and one-year (2.89%) adjustable-rate mortgages reached record lows. (You can find more about fees and points here.)

Rates below 4% for 30-year fixed loans can be found, if you're looking. And those who hope to refinance are in the hunt.   Post continues after video.

For instance, HomeStreet Bank of Seattle received 402 mortgage applications -- about two-thirds were for refis -- in the first nine days of this month, compared with 716 total in July, The Seattle Times reports.

The Mortgage Bankers Association said mortgage applications for the week ending Aug. 5 rose 21.7% over the previous week, and about three-quarters of all applications were for refis. (Should you refinance? Try MSN Money's calculator.)

But homebuyers -- possibly looking to see if housing prices are going to drop even more -- are still holding back. "Despite these low mortgage rates, applications for home purchase have remained little changed through the summer," the association said.

Why so low?

Frank Nothaft, vice president and chief economist at Freddie Mac, attributed the drop in mortgage rates to two major factors:

• "Renewed market concerns about the European debt markets led investors to shift funds into U.S. Treasuries, pushing long-term yields lower."
• Because of concern about the weak economy, the Federal Reserve decided that "an exceptionally low federal funds rate should be maintained at least through mid-2013."

So much for predictions that Standard and Poor's downgrade of Uncle Sam's credit would lead to higher borrowing costs for the government and for consumers. The Washington Post explains:

But the volatile stock market has scared off investors. They flocked to the relative security of U.S. Treasurys despite the downgrade, pushing down the interest rate. Rates for mortgages and other consumer loans tend to mirror the movements in the U.S. bond market.

Treasurys are downright attractive compared with the debt problems of Europe. "We are the prettiest horse in the glue factory," Brett Sinnott, director of secondary marketing at CMG Mortgage in San Ramon, Calif., told Bankrate.

Some say the low mortgage rates will hang on, perhaps through the end of 2011. Or maybe not. Greg McBride, senior financial analyst for Bankrate, said, "Eventually the downgrade will catch up with Uncle Sam, and consumers and businesses will also pay higher rates. But for now, the weak economy remains front and center."

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