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The drop in mortgage rates created a frenzy of refinancing. Should you jump in?


A drop in mortgage rates this week grabbed the attention of homeowners and lenders alike, generating a flurry of refinance activity that could translate into real savings for many borrowers.

The turmoil that rocked the stock market Wednesday helped push the average rate on a 30-year, fixed rate mortgage to just a whisker below 4 percent this week for the first time in 16 months. For many, the dip crossed a psychological barrier.

As soon as lenders saw signs of rates plummeting Wednesday, they began reaching out to homeowners in a furious burst of phone calls and e-mails.

“That day, we made 30 calls to clients, and 20 of them locked in rates,” said George Light of Home Savings and Trust Mortgage in Fairfax, Va. said Friday. “It’s still going. Two months ago, we closed on maybe two refinances. Now we’re on track to close at least 30 next month alone.”

At Quicken Loans, one of the nation’s largest mortgage lenders, the volume of loan applications Wednesday was double what it was any day last week, said Bob Walters, chief economist for the Detroit-based lender. Most of the activity came from people looking to refinance, who are typically more sensitive to rate changes than borrowers looking to buy a home.

“The levels still remain elevated,” Walters said Friday. “Any time the rates fall in this range, people often find they are in the money, meaning they can save quite a bit by refinancing.”

Rates on a 30-year, fixed rate mortgage fell to 3.97 percent this week, down from 4.12 percent last week and 4.28 percent a year ago, according to mortgage giants Freddie Mac’s weekly survey. The last time the average dropped below the 4 percent mark was the week of June 20, 2013, when it hit 3.93 percent.

Usually borrowers refinance if they can save at least one percentage point on the interest rate, and even a savings of as little as half a point may make sense in some cases. Today, nearly 11 percent of borrowers with a 30-year, fixed-rate mortgage have rates above 5 percent and solid credit, meaning 4.4 million borrowers could benefit from the current rates,  according to an analysis by Black Knight Financial Services.

Rates began falling in late September as investors, nervous about global economic stability, started plowing their money into relatively safe U.S. bonds. When demand for long-term bonds is high, the yield falls on long-term investments – which translates into lower rates on 30-year, fixed rate mortgages. Interest rates generally fall when the stock market does poorly.

The fall turned dramatic on Wednesday when stocks took a dive as investors reacted to surprisingly poor U.S. retail sales, slumping economies in Europe and Asia, and fears about the Ebola outbreak. Early that day, rates fell a quarter of a percentage point below where they were on Tuesday, lenders said.

That’s when Theresa Strange and her husband quickly locked in a 3.5 percent rate on a new mortgage for their house in Woodbridge, Va. – shaving half a percentage point off their current loan. They will save $140 a month if their new loan closes as planned next month, Strange said.

When the couple started looking to buy a house in March 2013, they were pre-approved for a 3.25 percent interest rate on a loan. But by the time they were ready to lock-in, the rate had jumped to 4.25 percent – adding $400 to their monthly payment. They didn’t want to get burned again.

“My husband is a financial adviser, and he watches these things closely. When he texted me and said: ‘I’m refinancing,’ I said: ‘Go for it,’” Strange said. “We never thought we’d see rates like that again.”

Strange is applying for a mortgage backed by the Veterans Administration. As of Thursday, the average rate on a 30-year, fixed-rate VA loans had dropped to 3.59 percent, according to a survey by Inside Mortgage Finance.

Mary Calderwood got wind of the low rates from her lender this week and also hopes to take advantage of those rates and refinance her Springfield, Va. home.  Calderwood and her husband bought the house in 2005, at the height of the housing boom. When the housing market unraveled, the home’s value plummeted. Last time rates fell below 4 percent, the couple did not have enough equity to qualify for a refinance.

Now they do. This week, they locked in a 3.5 percent rate, half a percentage point lower than the rate on their current loan. “We have a little more value. We’ve paid down a little more principal, and we’re able to take advantage of the low rates,” Calderwood said. “My lender reached out to me to tell me what’s going on, and I just passed the news along to everyone I knew.”

It’s too early to tell if the flurry of refinancing activity is sustainable or if it’s of any consequence to the economy, which would benefit if a sizeable chunk of homeowners lowered their monthly mortgage payments and spent the extra cash.

For some borrowers, refinancing won’t make financial sense. Some people may not plan to be in their homes long enough to recoup the costs of a refinance. Others may have too small a loan balance to make it worth the cost.

Many borrowers may not even qualify for a refinance. Lending standards remain so stiff that even former Federal Reserve Chairman Ben S. Bernanke could not refinance his loan — a tidbit he revealed at a conference earlier this month.

Richard J. Green, a sales manager at Presidential Bank in Bowie, Md., said he knows of at least one homeowner who saw her hopes dashed this week. One of his customers was hoping to refinance her condominium. She had solid credit, but her building was the problem.

There were too many units with owners who were behind on their condo fee payments, Green said. She would have been rejected if she’d tried to refinance because the building failed to meet the requirements of mortgage giants Fannie Mae and Freddie Mac.

“These have been a crazy few days,” Green said. “It’s a great time for a lot of people, just not for everybody.”

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