Mortgage Rates Fall to Record Lows

Mortgage giant Freddie Mac (FRE) said on Jan. 15 that rates on 30-year fixed-rate mortgages fell below 5% this week — the lowest level since it began surveying lenders in 1971.

The average rate on a 30-year fixed-rate mortgage was 4.96%, with a fee equal to 0.7% of the mortgage, for the week ending Jan. 15, 2009. It was down from last week when it averaged 5.01 percent and has been falling for 11 straight weeks.

Keith Gumbinger, a vice-president at research firm HSH Associates in Pompton Plains, N.J., said it makes sense to refinance now—if you can qualify.

"We're near 50-year-low interest rates," said Gumbinger, who estimates that rates haven't been this low since 1961. "How much lower do you think they can get?"

Rush to Refinance

Interest rates began dropping after the Federal Reserve and the Treasury Dept. announced on Nov. 25 that the government would buy up to $500 billion of mortgage-backed securities backed by Fannie Mae (FNM), Freddie Mac, and Ginnie Mae.

The lower interest rates have triggered a flurry of refinancing activity as homeowners with good credit and equity in their homes—an unusual combination these days—rush to lock in. The Mortgage Bankers Assn. said on Jan. 14 that for the week ending Jan. 9, its refinancing increased jumped 25.6%, hitting a level not seen since June 2003.

Mortgages for home purchases have also increased, but it could be some time before the lower rates translate into a huge rise in new mortgage applications. The process of buying a home takes time, and winter is typically slow time for the housing market.

Homeowners looking to refinance at today's low rates face more challenges than they did during the boom. Television producer Lisa Aliferis and her husband recently refinanced their San Francisco Bay Area home, knocking their annual interest rate down from 5.5% to 4.8%. Even though their credit scores were excellent and they were borrowing just a fraction of what their home is worth, Aliferis and her husband struggled for weeks to nail down a rate that made the refinancing attractive. Even then they had to pay three-eighths of a percent of the loan in fees and sign the papers in just three days. "It was a chore," Aliferis says. "I don't know what it would be like if we didn't have good credit scores."

Greater Scrutiny

Dana Johnston, a mortgage broker at Broker One in Los Altos, Calif., says his office is inundated with calls from people looking to refinance, but actually getting them a new loan is difficult. Part of the problem is that their home equity may be less now because home prices have fallen. That may require them to pay higher rates or take out mortgage insurance.

More documentation of income and assets is now required, and banks are no longer counting income from nonrecurring sources such as stock sales, Johnston says. Having a FICO score of at least 680 is now required. Subprime loans are almost nonexistent. In the past, borrowers could decrease their rates steeply by paying higher fees up front. Now, the spread between those fees and the interest rate is much tighter, so there is less incentive to do so.

Another big change is that lenders are offering the lowest rates sometimes for just a few hours a day. In the past, lenders would update their loan pricing once a day. Now banks send new rate quotes as many as four times a day. "The problem is funding capacity is so limited, banks may get too many requests and raise rates within an hour," Johnston says.

Rates to Remain Flat

Expect to pay up to a point if you want a rate below 5%, said David Zugheri, co-founder of Envoy Mortgage in Houston. But refinancing can still be attractive even with a fee. A borrower paying 6.25% can recoup a 1% fee in about a year if he can lock into a new 4.75% rate, he said.

"All in all, the really good interest rates come with a cost," Zugheri said.

Freddie Mac spokeswoman Eileen Fitzpatrick is in the process of refinancing now. She was able to reduce her rate from 6.6% to 5.1%. Fitzpatrick said she could have gotten a lower rate but was unwilling to pay a point.

Mortgage rates are likely to remain flat for the rest of the year, hovering between 5% and 5.25%, according to Freddie Mac projection.

"The interest rate was 5.21% in June 2003," Fitzpatrick said. "I never thought it would go below that."

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