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.

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