A spike in mortgage rates has dried up refinancing opportunities for many borrowers, despite a heavy government push to lower rates. Rates on 30-year mortgages averaged 5.6 percent last week, a sharp increase from rates below 5 percent in late May, according to a weekly rate survey from mortgage buyer Freddie Mac.
Although rates have dropped this week on fears surrounding the strength of a recovery, they remain high enough to block many borrowers from a refinance.
“You can kiss the sub-5-percent rates goodbye,” said Greg McBride, a senior financial analyst at .
Higher rates are choking off refinance activity, which dropped by 23.3 percent last week from the week before and is down about 19.6 percent on a four-week moving average, according to an index released Wednesday by the Mortgage Bankers Association.
Refinancings accounted for about three of every four mortgage applications in late May but are now about 54 percent of all mortgage applications.
Although 30-year mortgage rates in the mid- to high-5-percent range are low by historical standards, they aren’t low enough compared with the 6.5 percent rates seen from 2004 to 2008, said Lou Barnes, a mortgage lender in Boulder.
Typically, mortgage rates drop significantly coming out of a recession. For example, they moved from 8.5 percent to 5.25 percent as the economy bounced back from the 2001 recession.
A borrower should refinance only when the new rate he or she can get is at least 1 to 1.5 percentage points below the previous rate, said Steve Levey, chief executive of GHP Horwath, an accounting firm in Denver that provides financial advice. Even in that situation, recouping the cost of refinancing typically takes about two years, he said.
Lower rates can lower mortgage payments, freeing up disposable income needed to support a recovery. A 1-percentage-point rise in mortgage rates translates into about a 10 percent to 12 percent increase in home payments, according to Deutsche Bank.
To get rates lower, the Federal Reserve has purchased about $500 billion in mortgage-backed securities this year and will likely purchase a similar amount in the second half of the year.
But burgeoning federal deficits, which could top $1.8 trillion this year, are also putting upward pressure on the yield investors are demanding to buy government debt.
Borrowers face other issues, even if rates drop again. Those with a credit score below 700 can expect to pay more in interest. And many borrowers have lost so much value on their home, they can’t meet the 20 percent equity requirement for many mortgages. Rising unemployment also could prevent more borrowers from reworking their loans.
“Even if rates went back to 5 percent tomorrow, it won’t solve the problem for everyone who wants to refinance,” McBride said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
