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Falling Mortgage Rates Haven't Affected Refinancing

Mortgage rates have been dropping rapidly all over the U.S. We're seeing lower interest rates compared to a year ago, but that hasn't appeared to faze borrowers the way it often has in the past

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Larry Alton
Nov 05, 2017
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Mortgage rates have been dropping rapidly all over the U.S. We’re seeing lower interest rates compared to a year ago, but that hasn’t appeared to faze borrowers the way it often has in the past.

Usually, a substantial drop in mortgage rates leads to an increase in applications for refinancing, but that hasn’t happened this year. Analysts believe this is mostly attributable to the rising levels of home prices.

Mortgage rates continue dropping

According to a report published on GuruFocus, the 30-year fixed mortgage rate on Zillow fell to 3.67% in August, which is down three points from the preceding month. It fell again in subsequent weeks, and although rates were at about 3.72% at the beginning of November, this particular investment retains great potential.

The rate is down a tenth of a percentage point from last November following the national presidential election, incidentally. Despite these lower rates, we’re not seeing a lot of activity among prospective homebuyers and current mortgage holders. Lower interest rates are appealing for those who are trying to save money on their mortgage.

“Even a slight drop in interest rates can make a profound impact on the amount of money a borrower is required to pay each month,” explains Patrick Stoy, a mortgage consultant at Market Consulting Mortgage. “The amount of money the average borrower with a good credit score could save each month by refinancing for a loan with a lower interest rate is simply left on the table, gone.”

But this year, the market has witnessed only a 0.1% increase in mortgage application volume during this season of lower interest rates, according to the Mortgage Bankers Association. That volume is about 22% less than it was a year ago.

In addition, there was only a 2% increase in refinance applications, which is 40% less than the same week last year at this point.

Rising home ownership affects lower refinancing rates

Economists believe the insubstantial changes in refinancing have more to do with rising home prices than anything else. Although interest rates are dropping, the reduction has not been significant enough to offset the short supply of properties for sale.

Home ownership rates have risen twice this year and are currently at 63.9%, the highest in several years. As a result of job growth, the housing market has skyrocketed. Great mortgage rates and more relaxed credit requirements have also contributed to the rise.

Many first-time homebuyers are taking advantage of FHA home loans and other government programs to help them purchase a home without a hefty down payment. Still, home ownership has not grown as much as it might have, due to lower supply.

“The American Dream of homeownership remains elusive, as the third-quarter figure shows little change in the overall rate,” Lawrence Yun, chief economist for the National Association of Realtors, said in a statement to Bloomberg. “The reason is simple. There is just not enough supply of homes to fully satisfy the desire to own.”

Mortgage rates are forecast to rise, dropping applications further

According to National Mortgage News, mortgage rates are on the upswing once again. Although they’re considerably lower than a few years ago, rates are projected to increase 5% above the current level in the next month, which should lead to a decrease of 2.6% in applications for both mortgages and refinancing.

According to a report from CNBC, the rising rates and fall in applications over the next few months will mostly occur due to political causes. “Investors are almost certain the Fed won’t move rates at this meeting and instead opt to do so at the December meeting,” wrote Matthew Graham, chief operating officer of Mortgage News Daily.

“Of greater importance (and of more interest to investors) is Trump’s pick to replace Janet Yellen as the Chair of the Federal Reserve.”

We’ll learn more about these political developments soon, but for now, economists recommend refinancing while rates are low.

Disclosure: I do not own any of the stocks mentioned in this article.

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