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Mortgage rate drop drives refinancing; home sales may wait

Associated Press / December 18, 2008
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Tony Jabon had an e-mail in to his mortgage broker by 10 a.m.

The 35-year-old environmental consultant in Charlotte, N.C., had heard about the Federal Reserve's decision to cut its key interest rate to nearly zero and wanted to refinance to something lower than 5.5 percent.

Within hours, he had locked in a rate of about 4.6 percent. He'll save about $160 on his monthly payment. "Any time you can save a dollar," he said, "why not?"

Homeowners across the country did the same yesterday. Mortgage brokers reported a surge of calls from borrowers seeking to take advantage of the Fed's extraordinary decision. Some brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments.

The national average on 30-year, fixed-rate mortgages was 5.06 percent yesterday, according to financial publisher HSH Associates - the lowest since the 1960s and down from 5.3 percent Tuesday.

"This is beautiful, oh my gosh!" said Patti Mazzara, a mortgage broker in the Minneapolis suburb of Edina, who was surprised when she looked up rates and found them well below 5 percent, down at least three-quarters of a percentage point from earlier in the week. "This is a whole new game now. Hopefully it's going to give people some relief."

The Fed, aiming to free up lending and jolt the economy back to life, cut the federal funds rate Tuesday from 1 percent to a target range of zero to 0.25 percent and pledged to keep funneling money into the market for mortgage investments.

It was the best news in months for anyone looking to lock in a 30-year, fixed-rate mortgage. But it was not expected to be a cure-all, and borrowers already in danger of foreclosure probably won't be able to take advantage.

"It's a call to action for homeowners looking to get out of adjustable-rate mortgages," said Greg McBride, senior financial analyst at Bankrate.com. "Unfortunately, it's not an equal-opportunity party."

An estimated 12 million Americans owe more on their home loans than their houses' current value, unemployment is still rising quickly, and foreclosures are soaring.

For people whose home values have plunged, "I could have a 1 percent interest rate, but it wouldn't help them," said Michael Maynard, a mortgage broker in Branford, Conn.

And economists expect falling rates to provide only a modest boost to home sales, especially as unemployment worsens amid what could be the longest economic downturn since the Great Depression.

"People tend to be more inclined to buy a house when they're confident about their employment and income prospects," said Wachovia Corp. economist Mark Vitner.

Besides lower interest on fixed-rate mortgages, rates should come down on adjustable-rate home equity loans. Those are tied to the prime rate, and prime rates came down immediately after the Fed move Tuesday.

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