After quietly drifting back toward the historic lows reached in the spring, attractive mortgage rates are convincing a growing number of homeowners that now is the time to refinance. The Mortgage Bankers Association said today that in the week ending October 2, its refinancing index jumped more than 18 percent from the previous week. The index—which measures loan application volume—is now at its highest level since May. The renewed interest in refinancing is a direct result of falling mortgage rates, which declined to 4.89 percent last week, the trade group said. Here are five things you need to know about the development:
1. Mortgage rate trends: After dipping below 5 percent in April, rates for 30-year fixed mortgages surged to nearly 6 percent by early summer. The flair was trigger by a sell-off in the treasury bond market, as traders became spooked by Uncle Sam’s massive spending binge. But in recent weeks, rates have slipped back around the 5 percent threshold. The development has enabled homeowners who missed earlier periods of attractive rates to apply for refinancing. "The bottom line is rates have dipped below 5 percent for the last couple weeks, and you are seeing a surge in refinance activity to reflect that," says Guy Cecala, the publisher of Inside Mortgage Finance.
2. Fed purchase extension: Some of the downdraft is a result of the Federal Reserve’s recent decision to extend by three months its program of buying up debt and mortgage-backed securities from Fannie Mae and Freddie Mac. The initiative, which was introduced last November, is one of the primary reasons that mortgage rates have remained remarkably low for nearly a year. While the Fed’s decision does not increase the amount of cash devoted to the program, it guarantees that demand for these assets will remain strong for a longer time. As such, the move "ensures that [mortgage] rates will remain low for the foreseeable future," Mike Larson of Weiss Research said September 23, the day the decision was announced.
3. Treasury rally: The downward trend in mortgage rates has also been aided by strong demand for U.S. treasury bonds. Thirty-year, fixed mortgage rates typically track the yield on 10-year treasury notes, which have declined sharply in recent weeks. Yields on 10-year treasury notes have slipped from an average of 3.77 in the first week of August to 3.28 last week. The treasury rally is somewhat puzzling, since it has occurred even as equity prices charged higher. Keith Gumbinger of HSH.com says that in addition to support from Uncle Sam—the Fed is also buying treasury bonds—the market for U.S. government debt has benefited from the abundance of cash that has been injected into the financial system. "Remember that central banks around the world just polluted the place with cash [during the financial crisis]," he says. "You can sit on it for a quarter, you can sit on it for six months, but ultimately you have to do something with it." Some of that money is finding its way into the treasury market and working to push yields down, Gumbinger says.
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