The last time Mark McCollam refinanced the loan on his three-bedroom house in Los Angeles, he figured mortgage rates would only head higher from there. He was wrong. Not that he's complaining.
The aerospace engineer recently refinanced again, lowering his mortgage rate by 1 percentage point to 3.5 percent. That's about $300 a month he plans to put toward school and other costs for his two young kids, and into savings.
"It just gives us a little bit of a cushion," said McCollam, 43. "Once we knew we could get the 3.5, that was our green light."
Mortgage interest rates have remained low for so long, lenders and borrowers alike have been expecting rates would only creep higher. Instead, they've tested record lows. Since Britain's vote last month to exit the European Union rattled financial markets, average long-term mortgage rates have dipped tantalizingly close to their all-time low of 3.31 percent set in November 2012.
That's prompting a flurry of purchases and refinancings as consumers like McCollam rush to take advantage. Mortgage borrowing has jumped to the highest level in three years, according to quarterly data provided by the Mortgage Bankers Association. Refinancing applications have posted big increases this month.
Ultra-low rates can mean big savings, but there's a catch: First, you have to qualify. Bad credit and insufficient home equity remain hurdles to refinancing. The dip in rates may not be worthwhile for homeowners whose mortgage rates are already low. And for would-be buyers, low rates don't overcome the struggle to come up with a down payment.
NEAR NEW LOWS
Long-term mortgage rates have been running below the two-decade average of 6 percent since 2009. Since last fall, they've averaged below 4 percent.
The so-called "Brexit" vote on June 23 added to investors' anxieties about a possible worldwide recession and stubbornly low inflation. They typically respond by buying more U.S. bonds, a traditional safe haven. Higher bond prices mean lower bond yields. That's good news for borrowers, because mortgage rates tend to follow the trajectory of the yield on 10-year U.S. Treasury bonds. The yield was 1.56 percent on Wednesday, up from the record low of 1.32 percent reached on July 6, according to Tradeweb.
The average rate on a 30-year, fixed mortgage was 3.45 percent this week, according to mortgage giant Freddie Mac. A year ago, it was 4.09 percent.
"Experts across the board thought rates would be higher than they are now," said Erin Lantz, vice president for mortgages at Zillow. "But the reality is rates didn't rise meaningfully and now they're back down."
ALL ABOARD THE REFI TRAIN
The prospect of a more affordable mortgage is prompting many borrowers to lock in lower rates. "We're seeing huge activity right now," said Mat Ishbia, president and chief executive of United Wholesale Mortgage, a national lender.
Zillow's online mortgage hub has also seen a surge in traffic. "Even though it's not that significant a drop in rates, that pretty small drop has driven a tremendous uptick in refinance activity," Lantz said.
Mortgage originations totaled $510 billion in the April-June quarter, the highest since 2013 when rates were last near the current averages, according to the MBA. Slightly more than half of that went for loans to buy a home, the best performance since the middle of 2007. Refinance loans of $235 billion was the highest since the third quarter of 2013. Refinancing applications slipped 1 percent last week after spiking 11 percent and nearly 21 percent the previous two weeks.
The MBA now projects that the dollar amount of mortgage originations will climb nearly 7 percent this year from 2015.
LOCK IN NOW OR WAIT?
Home loan rates are likely to remain low this summer, said Sean Becketti, Freddie Mac's chief economist, but probably not much lower than they are now.
Most loan officers at New American Funding have told borrowers take advantage of rates now, given that they are so close to the all-time low, said Jason Obradovich, executive vice president of capital markets at the Tustin, California-based mortgage lender.
"Generally we ask them to lock if they are happy with the rate and are ready to proceed," Obradovich said.
Eric Montas is itching to refinance, but not just yet.
The graphic designer from Sacramento, California, can shave $200 off his monthly home loan payments if he lowers the 4.25 percent rate he got when he bought his three-bedroom house six years ago to 3.75 percent. That's the quote he got from a lender in May.
"Saving $200 a month would mean an additional mortgage payment a year, or a significant amount invested into savings compared to how much I'm able to save right now," said Montas.
But with mortgage rates having fallen sharply since May, Montas is betting he can get an ever better deal if he holds out another month.
"I'm pretty sure they will fall," he said.
SO SHOULD YOU REFI?
The current average rate amounts to a savings of about $76 a month on a $200,000, 30-year, fixed-rate mortgage from a 4.09 percent loan two years ago. That may not sound like much, but over the life of the loan, that's $27,360 saved and about $27,379 in interest not paid to the lender.
The real beneficiaries may be homeowners whose credit score has improved or home value has increased in the last two years. "Six months, a year ago, they might not have been eligible for refinancing," Lantz said.
Here are some factors that could determine whether you get the most out of today's ultra-low mortgage rates:
To get the lowest interest rate, borrowers should have a clean credit report and a FICO credit score of 740 or higher. Scores below 680 will make it harder to qualify. Consumers are entitled to a free credit report every 12 months from each of the credit bureaus: Experian, TransUnion and Equifax. Request yours at: http://www.annualcreditreport.com.
Calculate your monthly savings and how much you'd save over the life of the loan if you refinance with an online tool like this one from Bankrate: http://www.bankrate.com/calculators/mortgages/refinance-calculator.aspx.
Don't be fooled into thinking that you're getting a better deal when it's simply a new loan with a longer term. For example, a homeowner with a $250,000 balance on a 30-year mortgage issued four years ago with a 3.5 percent interest rate would reduce the monthly payment by about $110.02. But the new loan resets the clock to 30 years, meaning even at a lower rate the total interest paid would bump up the overall costs over the life of the loan by about $19,000.
To avoid this, tally up how much you're paying now in principal and interest and multiply it by the number of months left on your loan. Then do the same calculation using the figures under the new loan.
As a general rule, "If you can shave half to three quarters of a percentage point off your rate then refinancing is something worth looking into," said Greg McBride, chief financial analyst at Bankrate.
Next, ensure that savings on your principal and interest payment aren't outweighed by the charges and fees involved in obtaining a new mortgage.
Get quotes from several banks and ask that they put their offers in writing, including an estimate for closing costs and any extras, like loan points paid to lower the interest rate even further. Lenders typically charge fees for the mortgage broker's services, credit reports, a home appraisal and title insurance.
Estimate how long you will have to stay in the house to recoup those expenses with your monthly savings. Divide the estimated costs by the projected annual interest savings.
Lenders may allow you to roll the refinancing fees into your loan, sparing you upfront costs. However, this will increase how much you owe — and pay interest on — for the life of your loan.
Even borrowers who are underwater on their mortgage, or owe more than the home is worth, or those who have very little equity, may be able to refinance. They just have to do so through the government's Home Affordable Refinance Program, or HARP.
TYPE OF PROPERTY
Own a vacation or second home? These types of properties are eligible for refinancing, but they're generally going to carry higher rates than owner-occupied homes.
Veiga reported from Los Angeles, Boak from Washington.