March 7, 2007 / 12:03 PM / 13 years ago

Home loan refinancing surges as rates plunge

NEW YORK (Reuters) - Mortgage applications jumped last week as borrowers emerged in droves to refinance existing home loans as interest rates fell to their lowest level since early December, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity USMGM=ECI, which includes both refinancing and purchasing loans, increased 7.3 percent to 671.6 for the week ended March 2.

Applications were 16.7 percent above their year-ago level.

The indexes tend to be volatile on a weekly basis, analysts say. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 1.7 percent.

Jim Svinth, chief economist at LendingTree.com, an online company that matches consumers with lenders, said the drop in interest rates was viewed by consumers as a great time to refinance into a better mortgage product from existing ones.

“This refinance boomlet is a nice sign for the housing market,” he said.

“We are currently in the midst of a liquidity crunch in certain sectors of the market but clearly there are opportunities to be had for homeowners to get a great deal on a loan,” said Svinth, who is based in Irvine, California.

With an abundance of adjustable-rate mortgages resetting in 2007, consumers holding these loans have been refinancing into fixed-rate loans in recent months.

Consumers tend to be sensitive to shifts in interest rate moves when they are looking to refinance their current home loans, and the week’s sharp rise in refinancing demand was coupled with a drop in lending rates.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.04 percent, down 0.12 percentage point from the previous week to its lowest level since early December.

Interest rates were also below year-ago levels of 6.31 percent.

The group’s seasonally adjusted index of refinancing applications USMGR=ECI surged 15 percent to 2,234.2, up 38.4 percent from a year ago when the index stood at 1,614.4.

Demand for new home loans, however, was muted.

The MBA’s seasonally adjusted purchase index USMGPI=ECI, widely considered a timely gauge of U.S. home sales, rose 1 percent to 405.3. Compared with the year-ago level of 399.0, the index was up 1.6 percent.

Many analysts view the housing market as a key factor in Federal Reserve policy.

The next Fed policy-making meeting will be on March 20-21.

REFINANCING ACCOUNTS FOR BIGGER SHARE

The refinance share of applications increased to 46.1 percent from 43.2 percent the previous week.

Fixed 15-year mortgage rates averaged 5.73 percent, down from 5.84 percent. Rates on one-year adjustable-rate mortgages, or ARMs, decreased to 5.79 percent from 5.92 percent.

The ARM share of activity increased to 21.4 percent from 21.1 percent the previous week.

U.S. housing industry indexes, in general, tend to be volatile, and in recent months have painted a mixed picture, with some pointing to weakening and others to stabilization.

The MBA’s survey covers about 50 percent of all U.S. retail residential loans. Respondents include mortgage banks, commercial banks and thrifts.

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