Mortgage applications surge amid record-low rates
NEW YORK (CNNMoney) -- Mortgage loan applications surged 23% last week, according to the Mortgage Bankers Association, as record-low interest rates convinced many homeowners it was time to refinance into lower-cost loans.
Refinancing activity climbed 26.4% during the week ending January 13, to its highest level since early August, the MBA reported. Meanwhile applications for new mortgages climbed 10.3% week-over-week.
The heightened activity comes as mortgage rates test new bottoms. Last week, rates on both the 30-year and 15-year fixed loans fell to new records, at 3.89% and 3.16%, respectively, according to Freddie Mac.
The vast majority of the applications -- 82.2% -- were to refinance existing loans rather than purchase new ones, the MBA said.
The fact that purchase applications significantly lagged those for refinancings underscored a truism about low mortgage rates, said Doug Duncan, chief economist for Fannie Mae (FNMA, Fortune 500). "[Home] sales are a lot less interest-rate sensitive than people think," he said.
Home sales during boom worse than thought
Even with ultra-low rates, existing homes sales languished in November at an annualized rate of 4.4 million, according to the National Association of Realtors. That's well below the "normal" rate of between 5 million and 6 million.
Duncan pointed out that low and declining interest rates may cause homebuyers to hesitate: They may expect them to fall even further.
On the other hand, rising rates, which often accompany an improving economy, can give potential homebuyers a reason to act -- before rates and prices become less affordable.
Less favorable rates coming?
However, the days of record low rates may be ending -- thanks to a recent action by Congress.
To pay for the extension of payroll tax cuts, Congress mandated an increase in fees for Fannie Mae and Freddie Mac loans. That could mean an increase in upfront costs for borrowers of about half a point, starting April 1.
The average fee borrowers pay now is about 0.7% of the mortgage balance for a 30-year and 0.8% for a 15-year, according to Freddie, or about $700 or $800 for every $100,000 borrowed. The new fee would add $500 for every $100,000 in principal.
Instead of paying upfront, borrowers could pay the fee as a higher interest rate. Gumbinger said it would mean an additional one-eighth of a point to their rate.
That may not sound like much, but adding an eighth of a point to interest rates comes to an extra $225 a year or so on a $250,000 mortgage, according to Scott Sheldon, a loan officer with W.J. Bradley Mortgage in California.
"I'm telling all my clients that they need to get a lock immediately," he said.