Mortgage rates drop to even lower levels

Mortgage rates have plunged to levels last seen in the refinance boomlet of 2004.

Homeowners are getting the message, contacting lenders and brokers in big numbers.

The benchmark 30-year fixed-rate mortgage fell 18 basis points, to 5.57 percent, according to the Bankrate.com national survey of large lenders.

A basis point is one-hundredth of 1 percentage point.

The mortgages in this week's survey had an average total of 0.33 discount and origination points.

One year ago, the mortgage index was 6.32 percent; four weeks ago, it was 6.31 percent.

The last time the benchmark 30-year fixed rate was lower was March 24, 2004, when it was 5.46 percent.

The benchmark 15-year fixed-rate mortgage fell 17 basis points, to 5.11 percent. The benchmark 5/1 adjustable-rate mortgage fell 32 basis points, to 5.35 percent. The 30-year, fixed-rate jumbo, for mortgages more than $417,000, fell 13 basis points, to 6.85 percent.

Refis back in vogue

In just one month, the 30-year fixed has fallen 74 basis points. The low rates give creditworthy homeowners the chance to refinance. Some with fixed-rate mortgages will refinance to get a lower rate. Some with ARMs will refinance into fixed-rate mortgages so they no longer have to worry about what will happen to their monthly payments when the rate resets.

If you already have applied to refinance, you're not alone. Applications for mortgage refinances rose 8.3 percent last week, according to the Mortgage Bankers Association. They probably are rising even more this week, following the Federal Reserve's emergency rate cut, and with rates sinking to near four-year lows.

"Refinance applications are up 92 percent since the beginning of November, and purchase applications are up 7 percent," says Jay Brinkmann, vice president of research and economics for the Mortgage Bankers Association. "With tighter credit conditions, we do not know how many of these applications will become loans," he adds, but he says consumers clearly are responding to the lower interest rates.

Fed cut wakes up consumers

The thing that got consumers' attention was the Fed's unscheduled rate cut Tuesday morning.

Mortgage rates already had been falling for almost a month, but few consumers had noticed. They were busy putting away holiday decorations and closing their eyes every time they stepped on a bathroom scale or opened a credit card statement.

When the Fed reduced the short-term federal funds rate by three-quarters of a percentage point, homeowners called mortgage companies to find out if it was time to refi.

There isn't a direct connection between the overnight federal funds rate and 30-year fixed-rate mortgages, but many consumers don't know that.

Lenders simply were glad for the opportunity to do some business and maybe help some homeowners reduce their monthly payments.

"We're expecting the phones to ring off the hook today," said Jim Svinth, chief economist for LendingTree.com, shortly after the emergency Fed rate cut. "From a borrower's perspective, you can be done waiting. Today would be a good day to move on a mortgage."

Asking a banker whether you need a new mortgage is like asking a barber if you need a haircut. Of course, the answer is going to be yes. But 30-year fixed rates are rarely under 5.75 percent, so Svinth has a point.

"I would expect most of the effect to be on the refinance side," Svinth says. "People who knew what they wanted to do, knew they could do it, but were waiting for the right time."

The time is now -- with caution

His point is that now is the right time.

Echoes Bob Walters, chief economist for Quicken Loans: "You're in the mid-5s now. ... The key message is that people need to understand that there's not necessarily certainty that long-term mortgage rates are going to keep on dropping."

Walters notes that the Fed is trying to goose the economy by lowering short-term rates, and Congress and the White House are talking about a fiscal stimulus, such as a tax refund.

Push the economy enough and you end up with inflation -- and rising inflation would bring higher long-term interest rates, Walters says.

"The takeaway is: Don't get greedy," he says. "If you can knock a full percentage point off your mortgage rate right now, do it. If rates go down after that, refinance again. These things don't happen every day."

Who can't refinance

A note of caution is due here. Brinkmann mentioned it when he talked of tighter credit conditions. Some people who want to refinance aren't going to be able to refinance. These unfortunate souls fall into a number of categories.

First, millions of people have jumbo mortgages -- home loans for more than $417,000.

In August, jumbo rates skyrocketed because the demand for them dried up in the secondary market.

Jumbos have not yet taken back those rate gains from last summer. A lot of jumbo borrowers will find that today's rates are not competitive with the rates they got a few years ago.

Second, subprime borrowers are having trouble finding loan approvals. They can't refinance without getting approved for the loan.

Finally, people who bought houses in the last three years in bubble areas -- especially Southern California, South Florida, Las Vegas and Phoenix -- might be unable to refinance unless they have some cash on hand, because home values have fallen in those areas.

Let's say, for example, you made a 5 percent down payment when you bought your house two years ago, and its market value has fallen 10 percent since then.

You owe more than the house is worth. A lender won't refinance the loan unless you have enough cash to pay the difference, plus extra cash to make a down payment.

Many people won't fall into this trap because their home values haven't fallen much, if at all -- or they were old-fashioned and made a substantial down payment.