Refinance Applications Surge Following Unexpected Mortgage Rate Drop

May 16th, 2010

As expected, the significant drop in the U.S. stock market last week pulled down interest rates. Greece continues to be the focus of many economic discussions, even those involving U.S. mortgage rates and home buying. In the absence of any other economic data reporting this week, changes in mortgage rates were presumably due to news overseas and the domestic stock market rebound.

Consider the below economic information when making assumptions about interest rates for use with the many excellent mortgage calculators on this site.

Refinance Mortgage Applications Spike

For the week ending May 7, 2010, the Mortgage Bankers Association (MBA) reported in the Weekly Mortgage Applications Survey that refinance mortgage applications nationwide surged 14.8% versus the prior week. When the U.S. stock market unexpectedly and sharply dropped last week, mortgage rates declined correspondingly. Mortgage originators across the country encouraged their clients to take advantage of the temporary rate dip by immediately filing their refinance applications.

The increase in refinance applications was offset by a surprising 8.9% decline in purchase mortgage applications for the week. It was previously thought that many Americans would meet the April 30th deadline for entering into home purchase contracts for the IRS home buyer tax credit, and that last week should witness the stragglers’ last minute loan applications. The next few weeks will show whether mortgage application activity associated with the tax credit expiration continues to fizzle downward, or is already definitively finished.

As expected the MBA reported that the average 30 year fixed mortgage rate at 80% loan-to-value saw a sharp decline from 5.02% to 4.96%–a four week low. Refinance calculators will continue to be busy this week; while mortgage rates have edged back up a bit, they are still near historic lows, and should continue to prompt many homeowners to take advantage of current rates.

European Government Debt

European Government Debt

 

On May 9, 2010, European leaders together committed nearly $1 trillion to ensure financial stability among Eurozone members, after approving a controversial 110 billion ($146 billion) loan to Greece on May 2. The funds are intended to help the mostly Southern European nations in crisis to temporarily restructure their national debts. This is intended to help them avoid potentially defaulting on their debts, which would negatively impact all other nations using the Euro–and ripple across the developed world.

US Government Debt

 The European debt crisis has perhaps inadvertently benefited the US, since its dollar-denominated public debt has been sought aggressively as a hedge against further Euro crises. This has permitted the US to continue to borrow inexpensively, even as it has itself enacted confoundingly large domestic aid measures over the last two years.

In fact, the US dollar persists as the single most important reserve currency for the world’s central banks and other investors, providing many frequently unnoticed benefits to the average American. For instance, US consumer lending and mortgage rates have thus perhaps remained far lower far longer than if the recession had been isolated to the US alone.

However, the US does not possess infinite borrowing capacity either. The US federal deficit was $82.7 billion for the month of April alone. As the US. commits to help ensure its European allies’ financial solvency, our own debt is nearly reaching $13 trillion ($12.95T), or approximately 90% of US domestic annual income.

Thus, some international and domestic investors (including the Chinese government) are growing increasingly wary of US government debt. Any massive large-scale sell-off of US debt would likely cause an immediate and large-scale rise in US interest rates–although the current European financial crisis mitigates that likelihood significantly for now.

Jobs and Mortgage Rates

For the fourth week in a row, the number of Americans filing for initial unemployment insurance declined, this week to 444,000 new claims. The ongoing slow drop in initial claims from week to week is positive news, since it presumes improving underlying economic conditions and signals the economic growth needed to carry us out of recession. For now, many would likely agree that such results of economic recovery are far more desirable than perpetually low rates–but ultimately, as the economy improves, mortgage rates will rise.

If you have a mortgage rate over 5.5% or a hybrid ARM scheduled to adjust in the near future, now may be the time to refinance before rates recover significantly. Use a refinance calculator to see how current low mortgage rates may benefit you.

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