Lowest Mortgage Refinance Rates: Could Continue in 2012

Homeowners have been enjoying some of the lowest mortgage refinancing rates we’ve ever seen. And that trend could continue well into 2012.

The Federal Reserve has announced plans to keep long-term interest rates low, through various measures. This will likely result in a continuation of the low mortgage rates we have seen in recent months. Homeowners with sufficient equity and decent credit scores could capitalize on these lowest refinance rates, for the foreseeable future.

On September 29, Freddie Mac reported that lenders were offering the lowest mortgage rates ever. Average interest rates for both the 30-year and 15-year fixed mortgages dropped to their lowest points since Freddie Mac has been running the survey (1971). It bears repeating. We now have the lowest mortgage refinance rates we’ve had in 40 years. The phrase “once-in-a-lifetime opportunity” comes to mind.

As of September 29, the average rate for a 30-year FRM was 4.01%. The 15-year fixed-rate mortgage had an astoundingly low rate of 3.28%. And, if you were willing to roll the dice on a 5-year ARM loan, you could have locked in a rate of around 3%.

But there’s no need to fret if you missed the boat. The lowest refinance rates may stick around for a while. If the Fed’s current plan to keep long-term interest rates low actually succeeds (and it usually does), homeowners may benefit from those enticingly low rates well into 2012.

What it Takes to Get the Lowest Rates

Many homeowners share the misconception that everyone qualifies for the lowest refinance rates available. But this is not the case. The rates reported by Freddie Mac represent an average across a sampling of lenders. They also factor in the discount points paid by borrowers at closing.

Lenders assign rates based on the qualifications of individual borrowers. It is not a one-size-fits-all scenario. It is a broad spectrum with mortgage rejection at one end, and the lowest refinance rates on the other.

In order to qualify for the best rates available, a homeowner will need the following (at a minimum):

  • A sufficient amount of equity, as defined by the lender. Some lenders will only offer their lowest rates to borrowers who have at least 20% equity in their homes.
  • A “good” to “excellent” credit score. With an excellent credit sore of 760 or higher, homeowners have a much better chance of locking in the lowest refinance rates. With a good score between 640 and 759, homeowners can still get approved for refinancing, but they may not be offered the best rates.
  • Sufficient funds to cover closing costs. Lenders will check to ensure homeowners have enough money in the bank to cover their closings costs on the new loan. (See: Average cost to refinance a home)

These are certainly not the only criteria for refinancing a mortgage loan. Borrowers will also have to provide more documentation than they did in the past — bank statements, tax documents, etc. So you can think of these three items as the bare minimum for getting the lowest rates on a home refinance.

Another Wave of Mortgage Refinancing?

You might think the lowest mortgage refinance rates are something of a moot point, in light of the massive loss in equity we’ve seen since the housing bust. What good are low rates if so many homeowners are underwater? After all, you need some level of equity in order to be approved for a refinance loan (government programs aside).

As it turns out, there are still plenty of homeowners in the U.S. with positive equity. A recent study by real estate data firm CoreLogic revealed that 48.5% of homeowners with active mortgage loans have at least 25% equity in their homes. Many of these homeowners are also ideal candidates for mortgage refinancing, and they could therefore benefit from the lowest rates available on refinance loans.

Thus, we could likely see another “wave” of refis over the next six to nine months. It won’t be a tidal wave, mind you — more like a high tide. But we should certainly see a rise in refinancing applications in the coming months.

Granted, having sufficient equity isn’t the only criteria for refinancing a mortgage loan. Some homeowners are too far along into their payback periods to benefit from a refinance loan. In most cases, the goal of refinancing is to save more over the term of the new loan than what you’d pay in closing costs. So you have to keep the new loan (with lower monthly payments) for a certain period of time, in order to recoup the amount you spend in closing costs. This is often referred to as the break-even point, or BEP.

[In depth: When should I refinance my mortgage?]

Still, we will likely see a sustained rise in refinancing activity between now and mid-2012. Rates are the lowest we’ve seen in decades. A rising number of homeowners are meeting the equity requirements needed to refinance. And the Federal Reserve is taking actions to keep rates low for the foreseeable future.