More Homeowners Refinance As Interest Rates Climb

Despite a recent increase in mortgage interest rates, fewer homeowners were inclined to pursue refinancing options two weeks ago. However, with interest rates appearing to settle, mortgage refinances are gaining traction. According to a seasonally adjusted measure by the Mortgage Bankers Association (MBA), refinance applications increased five percent in the past week. This is particularly surprising, as applications to refinance fell nine percent in the week leading up to the increase. Regardless of the fluctuations, refinance applications are still down a staggering 69 percent from last year.

As recently as December 25, the average rate on a standard 30-year fixed loan reached 4.72 percent. The recent trend, which has witnessed interest rates climb from their previously record lows, may be partially attributed to the Federal Reserve’s announcement to curtail purchases of mortgaged-backed bonds.

In an effort to remove the U.S. economy from its previous economic lull, the Federal Reserve began purchasing government bonds to the tune of approximately $85 million a month. In doing so, officials hoped to retain low interest rates while simultaneously encouraging borrowing and investing.

However, it has been announced that these purchases will begin to unwind. Accordingly, the nearly $85 billion that the Federal Reserve is currently spending every month on mortgage-backed securities will begin tapering soon. News of the cutbacks served to increase interest rates.

Increased interest rates may not be as bad as people may think. Brad Crombie, head of fixed-income for Aberdeen Asset Management, acknowledges that investors need to look beyond our current situation. Rates continue to remain relatively low without the impending threat of a spike. Crombie said it’s worth remembering that banks are in much healthier financial shape now than they were five years ago at the peak of the financial crisis. Banks are more ready than ever for higher interest rates to boost lending returns. The more they loan out, the more the economy will grow, Crombie said.

As we have already seen, current mortgage rates have already enabled more borrowers to refinance their properties. Applications for refinancing have become more prominent. However, applications to acquire a mortgage failed to bounce back. Mortgage applications actually dropped one percent on the week.

“Mortgage application activity remained weak over the holiday period, with purchase applications almost twenty percent lower than at the same time last year,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association. “Other economic data is reflecting a strengthening economy, so this weakness is likely due to a combination of the increase in rates and still tight credit.”