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Friday, July 23, 2010

Falling Mortgage Rates Setting Off New Wave of Refinancing

Mortgage rates continue to set new record lows. According to the Fed, the average 30-year mortgage rate hit 4.57% last week. Rates have been pushed down about 70 basis points since the Greek sovereign debt crisis this past Spring. The market uncertainty boosted investor appetite for US Treasuries due to the “flight to safety.” This, coupled with a general sentiment that the US economic recovery will be slower than previously anticipated, has had the effect of driving down long term interest rates.

Many borrowers are now seeking to take advantage of these historically low mortgage rates, similar to prior years, where large rate drops fueled periods of heavy refinancing. Since the beginning of April, the pace of mortgage refinance applications has doubled according to the MBA Mortgage Application Survey. This should help to bolster fee income for banks involved in mortgage originations.

More important however, is that borrowers will now have additional disposable income in order to help drive consumption demand. A hypothetical borrower with $150,000 in outstanding principal who refinances their 30-year mortgage from a rate of 6.0% to 4.5% would be reducing their monthly payment by about $130. However, these cash flow savings will be limited to only those borrowers with sufficient levels of home equity. This will be a limiting factor to the magnitude of the refinancing surge.

1 comment:

Real Estate Note said...

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