Refinance applications for mortgages fall

Refinance applications drop, partly because of a slight rise in interest rates. But the math behind refinance applications also plays a role.

|
Paul Sakuma/AP/File
A Bank of America booth is shown at the Pacific Coast Builders Conference in San Francisco earlier this summer. Refinance applications for home mortgages dropped last week as interest rates edged up slightly.

Applications for new mortgages fell to their lowest level in nearly 15 years, despite depressed home prices and near-record low interest rates, according to a new report. Refinance applications dropped as well.

Overall mortgage volume decreased 2.4 percent last week, the Mortgage Bankers Association reported Wednesday.

Why aren't more homeowners and would-be homeowners taking advantage of such low interest rates?

The MBA in a statement blamed the fall on "volatile markets and rampant uncertainty," which kept home purchasers on the sidelines.

A slight rise in mortgage interest rates caused refinancers to pull back as well. The average rate for a 30-year fixed mortgage rose from 4.32 to 4.39 percent with a slight increase in points, while the average for a 15-year fixed mortgage increased from 3.47 to 3.56 percent with a slight decrease in points.

The other challenge for homeowners wanting to refinance is the law of diminishing returns: The lower interest rates are, the bigger the drop needed to make it worthwhile to refinance a mortgage.

For example, a drop from 6 percent to 5 percent on a $200,000 mortgage saves homeowners about $126 a month. Over 16 months, that would allow them to save $2,000 to defray refinancing costs. But a drop from 5 percent to 4 percent saves homeowners only $119 a month, requiring almost an extra month to save the same $2,000.

If interest rates were to fall, say, another half a percentage point, refinance applications would be sure to surge. Many homeowners would still find refinancing worthwhile. But the savings they realize – as well as the pop that extra money gives to the economy – is diminishing as interest rates fall.

It's simple math.

You've read  of  free articles. Subscribe to continue.
QR Code to Refinance applications for mortgages fall
Read this article in
https://www.csmonitor.com/Business/new-economy/2011/0824/Refinance-applications-for-mortgages-fall
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe