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Why Aren't More People Refinancing Their Mortgages?

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Interest rates on mortgage loans are at record lows. So why are so few people taking advantage of them?

In a functional market, borrowers take advantage of low rates by borrowing more. Yet that's not what's happening. Let's take a closer look at some of the factors that are preventing some homeowners from reaping the benefits of low rates.

As low as they can go
Back when the housing market worked more efficiently, there was one thing you could pretty much count on: When interest rates dropped, homeowners would take advantage of those lower rates to refinance their mortgages, cutting hundreds of dollars off their monthly payments or taking the opportunity to squeeze a little bit more of their equity in the bargain.

Today's conditions would typically make refinancing activity skyrocket. At this week's Treasury auctions, both 10-year and 30-year bonds set new record-low yields. And according to Freddie Mac, mortgage rates hit new lows for the 11th week in the past 12. With average 30-year mortgage rates at 3.56%, the typical mortgage features an interest rate that's nearly a full percentage point lower than it was this time last year.

But even as rates plunge, refinancing applications fell for the third week in a row, moving in the opposite direction than what you'd expect. As a recent CNBC article pointed out, that counterintuitive combination is nothing new, and it may reflect the new reality for housing for years to come.

Stuck in their homes
There's more to a mortgage than a rate. If the value of your property has gone down, then being underwater on your existing mortgage can prevent you from getting a refinanced loan. That's part of why the government expanded the authority of Fannie Mae and Freddie Mac to refinance loans under the Home Affordable Refinance Program, letting them eliminate restrictions on negative equity in allowing refinancing transactions to take place. Other program changes have opened up new opportunities for large groups of homeowners to refinance, and surges in refinancing activity have resulted.

Still, banks are being careful about mortgage activity. With Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) still reeling from their $25 billion settlement with federal and state regulators, the banks are eager to avoid any repeat of the painful foreclosure-abuse episode. The solution is demanding higher-quality loans that they'll never need to foreclose on.

Refinancing fatigue
But another reason for the decline in refinancing activity may simply be the fact that so many homeowners have already refinanced in the recent past. Given that rates have steadily declined over the past several years, there have been plenty of opportunities to refinance. Yet with homeowners having to jump through increasingly complicated hoops to go through the refinancing process, as well as having to pay what can be hefty closing costs each time, many of them may simply have decided that enough is enough. That's been good news for American Capital Agency (Nasdaq: AGNC  ) and other mortgage REITs, which face challenges when high levels of refinancing activity lead to returns of principal on mortgage-backed securities sooner than expected.

That could all change if the Federal Reserve gives any signal that interest rates might rise anytime in the near future. Right now, homeowners are being rewarded by their patience, as they keep the potential to lock in even lower rates down the road. But if rates start to go up, then it might prove to be the spark necessary to convince homeowners that it's worth going through the process one last time and maximizing their savings.

What to do
If you're on the fence about refinancing, don't just ignore the current opportunity. Run the numbers and talk with your lender about the possibility of reducing closing costs for a simple rate change on your mortgage loan. In some cases, by paying a slightly higher rate (that's still lower than you may be paying now), you may be able to get some of your closing costs credited back to you. Your loan officer or mortgage broker should be able to go through all your options.

Low rates won't do anyone any good unless more people take advantage of them. Mortgage rates might continue dropping, but even at their current levels, refinancing is worth considering if you haven't done it recently.

Being smart about your home loan is just one part of a successful financial plan. Investing smarter is also important. Get some useful tips from our special report: "3 Stocks That Will Help You Retire Rich." Get your free copy today while it lasts!

Fool contributor Dan Caplinger is very happy with his mortgage situation. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy keeps your roof over your head.


Read/Post Comments (4) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2012, at 10:15 AM, rhealth wrote:

    Exactly! They offer you low rates but they wont give you the loan. We call it chasing you up a tree then shaking it.

  • Report this Comment On July 13, 2012, at 10:40 AM, heball wrote:

    Those of us within sight of retirement age don't want to refinance our 30 yr notes even into a 10 yr and start the cycle over again. The banks have made enough money off of us, time for the Feds to increase interest rates and return some capital to our savings and checking.

    State, county, city governments are in fiscal dire straits due to the fact their investments are not reaping the capital required to properly maintain the General Fund. So called state mandated safe investments are driving government agencies to cut back on services normally provided during the best of times.

    Everyone suffers.

  • Report this Comment On July 13, 2012, at 2:22 PM, TMFPennyWise wrote:

    Re: HARP refinancing

    I highly recommend to anyone who is relatively current on payments and who hasn't refinanced in a while, especially because they think they are underwater, to investigate the HARP plan online and with their mortgage banker.

    We used this plan to refinance 2 rental properties and the bank didn't even require appraisals despite knowing the houses were underwater. And they rolled the application fees into the mortgages so we were not out of pocket one cent at the git go. They offered us short term and long term mortgages at extremely competitive rates (considering no one else wanted to touch underwater refinancing.)

    I have talked about this HARP plan with several friends who needed to refinance but were discouraged because they were underwater. They knew nothing about HARP and didn't think they would qualify for the government plan because of their nice middle class incomes. But there are no income limits for high income earners.

    I really recommend checking out the HARP refinancing.

    Jay

  • Report this Comment On July 15, 2012, at 9:46 PM, smurfffool wrote:

    I refi'd under HARP three years ago. Tried again recently to get even better rate but appraisal was almost 25% less. So without 80% equity and no HARP (can't do it twice), another refi is a no go. I didn't know the rates would go down even further when I used HARP the first time. Yeah, I suck at stock market timing too!

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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