Mortgage rates are at their lowest level in six decades. (Gene J. Puskar/AP)

With mortgage rates at record lows, even people who refinanced just last year are looking to take out a new mortgage, mostly because they are the lucky few who can qualify for one.

The average rate on a 30-year fixed-rate mortgage has recently dropped closer to 4 percent, hitting 4.09 percent this week — the lowest level since Freddie Mac started tracking the data in 1971. The 15-year fixed-rate mortgage, a popular refinancing tool, fell to an all-time low of 3.3 percent on average, Freddie Mac reported.

Still, refinance activity has been constrained by tough lending standards, a weak job market and eroding home values — all of which have have kept millions of homeowners on the sideline. That leaves lenders chasing after a limited number of good credit quality borrowers who have enough equity in their homes to qualify for a new loan.

The effect is a more polarized refinancing market that has been particularly unforgiving to those who have watched their neighborhood home prices tumble through no fault of their own, even if they have good credit and a steady income. Meanwhile, the group of homeowners whose home values have held up are able to take advantage of lowered rates again.

Federal initiatives aimed at expanding the pool of potential borrowers eligible to refinance have fallen far short of expectations.

“Lenders are refinancing the same group of very qualified borrowers,” said Guy Cecala, publisher of Inside Mortgage Finance. “There just aren’t a whole lot of new [borrowers] coming into the mix.”

But those who can join in still need to think through the basics.

For starters, figure out what your monthly payment would be at the new rate. Compare it with what you’re paying now and decide whether the savings — if any — will offset the cost of refinancing the loan. Keep in mind that the average closings costs are $4,479 in the District, $3,745 in Virginia and $3,692 in Maryland this year, according to

Then think about timing.

For instance, if you reduce your payments by $125 a month on a mortgage that costs $3,745 to refinance, it will take 21 / 2 years for you to break even on that loan, said Greg McBride, a senior financial analyst at If you expect to sell the home sooner than that, it makes no sense to refinance. But if you plan to stay longer, the lower monthly payments frees up cash “in much the same way as a nice raise at work would,” he said.

To drum up business, many lenders are rolling the closing costs into the interest rate for customers who have enough equity in their homes, enabling borrowers to avoid paying the upfront cash and eliminating the usual angst about the break-even point. Rates are so low now that lenders can do that and still make the numbers work for the borrower.

“It then becomes a no-brainer,” said Brackton Pratt, a senior vice president at First Savings in McLean. “You’re saving money from the first day. If for some reason you move or you end up selling your house, it doesn’t matter. That’s why we have customers who are refinancing just to get 3 / 8ths of a drop in their rate. Some have even refinanced twice within the year. Why not?”

But the best course of action ultimately depends on your goals.

For Stuart Brawley, minimizing the total interest he pays during the life of his loan is more important to him than lowering his monthly payments, he said. That is why he is refinancing from a 30-year fixed-rate loan to a 15-year fixed-rate loan.

Doing so will add about $90 to his payment each month (or $16,200 during the life of the loan) because he is paying down his principal more quickly, said Kathy Joseph, a senior mortgage banker at Apex Home Loans in Rockville. But it will slash his interest rate from the current 5.75 percent to 3.38 percent — saving him more than $124,000 in interest payments.

“I guess when I saw my mortgage statement every quarter and I saw that I wasn’t making a dent in my principal, it seemed like a good idea to pay it off earlier,” said Brawley, vice president of finance at Spire Investment Partners.

Joseph said that she has had many customers switch from 30-year to 15-year loans in recent weeks because they were looking for a place to put their extra cash. “They would rather put the cash into their house than into some other investment where there is a very low rate of return, like a savings account or a money market fund,” Joseph said.

Freddie Mac’s most recent data verifies that trend. Of the homeowners who refinanced their 30-year fixed-rate loans in the second quarter, 37 percent chose a 15-year or 20-year loan, according to Freddie Mac. That’s the highest such percentage since the third quarter of 2003.

Frank Nothaft, Freddie Mac’s chief economist, attributes the rise as a growing desire among consumers to reduce their debts.

“It may be that those homeowners who can manage a slightly higher monthly payment choose to go with that product because it allows them to de-lever more quickly,” he said. “It tends to be more popular with those who have owned their homes many years and have an eye toward retirement. They want to own their homes free and clear.”

But many borrowers won’t get a break no matter how low rates go.

One of the biggest challenges for them is that their home values have declined to the point where they are now “underwater,” meaning they owe more on their mortgages than their homes are worth, making it tough for them to refinance.

About 23 percent of U.S. homes with mortgages were underwater in the second quarter, according to a report released this week by CoreLogic, a mortgage research firm. Nearly 75 percent of borrowers who are in this situation are paying above-market interest rates on their mortgages, suggesting they’re stuck in the loans they’ve got.

Even people with some equity are stuck, said George Light, a mortgage banker at Home Savings and Trust Mortgage in Fairfax. He cites a customer who bought an $800,000 home six months ago after making a 20 percent down payment. That customer now wants to refinance, but the home appraisal needed for a new loan presents a hurdle.

Appraisals are based on the most recent sales of comparable homes in a borrower’s neighborhood.

“Since he bought his house, three houses in his neighborhood have sold for about $60,000 less than what he paid,” Light said. Now, the borrower has less than 20 percent equity in his home, which means he would have to pay private mortgage insurance if he refinanced, in effect wiping out the savings he had hoped to gain from the transaction, Light said.

To help borrowers in similar situations, the Obama administration has the Home Affordable Refinance Program (HARP) for people who owe up to 25 percent more than their homes are worth. Only borrowers who took out loans backed by Fannie Mae and Freddie Mac before June 2009, and who have been on time with their payments, are eligible.

But only 838,000 borrowers have refinanced through this initiative since its launch in March 2009 — nowhere near the 4 million to 5 million that the administration had hoped to reach by now.

Mark Zandi, chief economist at Moody’s Analytics, told a Senate committee this week that part of the problem is that Fannie Mae and Freddie Mac have imposed additional interest rate charges and higher credit score requirements on borrowers with little or no equity or weak credit.

Those borrowers are offered interest rates that are about half a percentage point higher than market rates, he said.

Another issue is that lenders don’t want to take a chance on such borrowers because they view them as a legal liability, Zandi said. If those loans go bad, Fannie and Freddie are taking an especially aggressive stance to recoup the losses by forcing lenders to buy back the loans.

In an address to Congress this month, President Obama said the administration would “work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent.”

Last week, the head of the agency that oversees Freddie Mac and Fannie Mae said the agency would try to determine if it can expand HARP in a way that reaches more homeowners.

Against this backdrop, it’s no wonder that the refinancing activity is not as robust as it should be, given today’s low rates, many industry experts said.

It’s about 70 percent below the unprecedented refinancing boom of 2003, said Mike Fratantoni, a vice president at the Mortgage Bankers Association. Back then, rates dropped below 6 percent for the first time in decades, Freddie Mac data show.

Still, many lenders are busy coping with inquiries from eager borrowers.

“The consumers whose transactions [are] going to take a lot more time to work on because maybe there’s a couple of out-of-the-ordinary things about the loan application are the ones who are going to have a tough time,” said Eric Gates, president of Apex Home Loans.