While Fannie Mae announced that mortgage rates had increased this week to 4.46%, refinancing rates experienced a drop. Signs of an improving economy, however, are inspiring people to buy homes. Yet with an increase in interest rates, home refinancing falls out of favor.
Refinances Fall
Last week, applications for refinancing dropped below 75% of all mortgage applications. During the late summer of 2010, refinancing seemed to be the choice of many home owners. In early August, loan applications for refinancing accounted for more than 80% of all applications.
Only once before in recent years had applications for refinancing come in above 80 per cent. Micheal Fratantoni of the Mortgage Bankers Association points to the 80-plus percentage "in 2003, for one week, when the rate on 30-year mortgages fell below 5% for the first time since the 1950s." In 2003, the total amount of mortgages issued was almost $4 trillion – with $2.5 trillion (60%) in refinancing.
Refinancing numbers fell temporarily for a single week during October 2010. Yet afterwards, refinancing statistics stayed the same until November 19. Since June, there has not been a fall in refinancing numbers that compares with the recent drop.
Mortgages Rates Rise
According to a survey (including higher-interest jumbo loans) released by the Mortgage Bankers Association, the average 30-year contract rate tops 4.5%. Increased mortgage rates (especially above 4.5%) will bring about a decrease in refinancing numbers. Indeed, there would be less refinancing except some homeowners wanted to act now before the next increase in mortgage rates.
Anxious Homeowners
Of course, rising rates are not the only factor responsible for low refinancing numbers. Many homeowners would like to choose a refinance. Yet they cannot go that route because of reduced home equity or a decrease in income. Both circumstances result from the economic downturn.
Indeed even if people have home equity, they are less likely to use it in a recovering economy. Most homeowners have to be confident about the economy before they will use their home equity to take out cash. Chris George, president of CMG Mortgage in San Ramon, explains how homeowners think about refinancing in uncertain times compared to booming periods.
"In '04, '05 and '06 it was all about leveraging your home equity.… I would say back then three-quarters or better of the people refinancing were pulling out cash. Now it's the opposite — people are de-leveraging, saving for a rainy day," says Chris George, president of CMG Mortgage in San Ramon.
Reasons to Refinance
Home owners refinance for varied reasons from tapping into equity to shortening term to maturity. Yet the main reason is to save money. If refinancing is to make sense for home owners, they have to save on payments. If homeowners can see only minimal savings, the industry cannot expect to see maximum numbers in refinancing.
Of course, some homeowners are choosing a refinance. The Mortgage Bankers Association suggests that refinancing will account for almost $1 trillion of the entire mortgage market in 2010. Michael Fratantoni detailed the predictions of the Mortgage Bankers Assn. for refinancing numbers in 2011.
"Purchase loans are expected to increase a bit, to $600 billion of the total, with loan refinancing at $400 billion, or 40%, as rates rise above 5% by the end of the year, " says Micheal Fratantoni of the Mortgage Bankers Association.
Will You Be Applying For A Refinance?
Image courtesy of blogcu.com