Still-low mortgage rates ushering new refi wave

The last time Mark McCollam refinanced the loan on his three-bedroom house in Los Angeles, he figured mortgage rates would only head higher from there. He was wrong. Not that he’s complaining.

The aerospace engineer recently refinanced again, lowering his mortgage rate by 1 percentage point to 3.5 percent. That’s about $300 a month he plans to put toward school and other costs for his two young kids, and into savings.

“It just gives us a little bit of a cushion,” said McCollam, 43. “Once we knew we could get the 3.5, that was our green light.”

Mortgage interest rates have remained low for so long, lenders and borrowers alike have been expecting rates would only creep higher. Instead, they’ve tested record lows. Since Britain’s vote last month to exit the European Union rattled financial markets, average long-term mortgage rates have dipped tantalizingly close to their all-time low of 3.31 percent set in November 2012.

That’s prompting a flurry of purchases and refinancings as consumers like McCollam rush to take advantage. Mortgage borrowing has jumped to the highest level in three years, according to quarterly data provided by the Mortgage Bankers Association. Refinancing applications have posted big increases this month.

Ultralow rates can mean big savings, but there’s a catch: First, you have to qualify. Bad credit and insufficient home equity remain hurdles to refinancing. The dip in rates may not be worthwhile for homeowners whose mortgage rates are already low. And for would-be buyers, low rates don’t overcome the struggle to come up with a down payment.

Near new lows

Long-term mortgage rates have been running below the two-decade average of 6 percent since 2009. Since last fall, they’ve averaged below 4 percent.

The so-called “Brexit” vote on June 23 added to investors’ anxieties about a possible worldwide recession and stubbornly low inflation. They typically respond by buying more U.S. bonds, a traditional safe haven. Higher bond prices mean lower bond yields. That’s good news for borrowers, because mortgage rates tend to follow the trajectory of the yield on 10-year U.S. Treasury bonds.

The average rate on a 30-year, fixed mortgage was 3.45 percent last week, according to mortgage giant Freddie Mac. A year ago, it was 4.09 percent.

All aboard the refi train

The prospect of a more affordable mortgage is prompting many borrowers to lock in lower rates. “We’re seeing huge activity right now,” said Mat Ishbia, president and chief executive of United Wholesale Mortgage, a national lender.

Zillow’s online mortgage hub has also seen a surge in traffic. “Even though it’s not that significant a drop in rates, that pretty small drop has driven a tremendous uptick in refinance activity,” Lantz said.

Mortgage originations totaled $510 billion in the April-June quarter, the highest since 2013 when rates were last near the current averages, according to the MBA. Refinance loans of $235 billion were the highest since the third quarter of 2013. Refinancing applications slipped 1 percent last week after spiking 11 percent and nearly 21 percent the previous two weeks.

Lock in now or wait?

Home loan rates are likely to remain low this summer, said Sean Becketti, Freddie Mac’s chief economist, but probably not much lower than they are now.

Most loan officers at New American Funding have told borrowers to take advantage of rates now, given that they are so close to the all-time low, said Jason Obradovich, executive vice president of capital markets at the Tustin, California-based mortgage lender.

“Generally we ask them to lock if they are happy with the rate and are ready to proceed,” Obradovich said.

So should you refi?

The current average rate amounts to a savings of about $76 a month on a $200,000, 30-year, fixed-rate mortgage from a 4.09 percent loan two years ago. That may not sound like much, but over the life of the loan, that’s $27,360 saved and about $27,379 in interest not paid to the lender.

The real beneficiaries may be homeowners whose credit score has improved or home value has increased in the last two years. “Six months, a year ago, they might not have been eligible for refinancing,” Lantz said.