Never have rates on long-term fixed mortgages been as low as they are now: 3.91 percent for a 30-year home loan, on average, and 3.21 for a 15-year loan.
Such rates make now a tantalizing time to refinance. And, with home prices having sunk in most areas, many would-be buyers are tempted. Yet the pace of refinancing and home buying has been mostly unchanged over the past year, mainly because so many Americans lack the home equity, credit scores, or cash to refinance or buy.
Here’s a look at whether and why it makes sense to refinance or buy.
Why now: More than 75 percent of homeowners with conventional government-backed mortgages are paying rates above 5 percent.
Why more people aren’t refinancing: In many cases, people whose home values have dropped are not eligible. Shrunken home values have reduced the total equity Americans have in their homes to under 40 percent - the lowest since the Great Depression. As a result, many people lack enough equity to qualify for refinancing. Or their credit scores are not high enough.
Another obstacle: Refinancers typically must pay thousands in closing costs and appraisal fees. Those costs usually add up to 1 percent of the loan’s value - $2,000 in fees on a $200,000 loan, for example. Typically, it’s worthwhile for homeowners to refinance if they can reduce their rate by at least a full percentage point.
Why more people aren’t buying homes: Too many would-be buyers can’t afford the required down payment, are out of work, lack enough income, or are burdened by large debt loads. Home prices have sunk 31 percent since the housing boom four years ago, leaving many Americans fearful that prices have yet to bottom. They don’t want to throw good money at a depreciating asset.
Half of would-be buyers say they don’t think they will ever save enough for the 20 percent down payment now expected by most sellers, according to a survey by the National Foundation for Credit Counseling.
For those looking to buy, banks are also insisting on higher credit scores. Roughly 60 percent of US households do not have the required scores above 700 to get a prime mortgage, according to an Associated Press analysis of Fair Isaac Corp., or FICO, and other credit-score data. The average US credit score is 661.
The consequences of refinancing: When people refinance, they pay less interest on their loans. So they end up with more money to spend, save, or invest. The savings can be significant. If, for example, a homeowner with a $200,000 mortgage at 6 percent can refinance down to 4.5 percent, the savings would be $3,000 a year.
Still, the benefits for the larger economy are limited. These days, most homeowners who refinance tend to sock away their savings or pay down debt, rather than spend the money.
Derek Kravitz writes for the Associated Press.