Mortgage interest rates fell to a three-month low last week, causing a surge in loan applications to refinance a mortgage or buy a house, according to a weekly survey conducted by the Mortgage Bankers Association (MBA).
The average interest rate on 30-year fixed-rate mortgages dropped to just 5.0 percent during the week that ended Sept. 4, the MBA reported. The average interest rate on 15-year mortgages dropped to just 4.45 percent during the same week. A year ago, the average interest rate on 30-year fixed-rate mortgages was 6.0 percent, a full percentage point higher.
Borrowers get lower interest rates
These very low interest rates prompted borrowers to submit a large number of loan applications. The volume of applications increased dramatically compared with previous weeks and was the highest since the last week of May, according to the MBA survey. Applications increased for both loan refinances and home purchases.
Many homeowners refinance their mortgage to get a lower interest rate and monthly payment or to trade in an adjustable-rate or interest-only mortgage for a fixed interest rate and predictable payments.
A dip in interest rates makes both of those options even more attractive as the savings could be even higher over the life of the loan. For example, the monthly payment on a $200,000 30-year fixed-rate mortgage at 5.0 percent would be $1,073 while the payment on the same mortgage at 6.0 percent would be $1,199, a difference of $126.
Tax credit helps home buyers
Low interest rates may not have been the only reason why more prospective home buyers submitted loan applications. Those who purchase a home before Nov. 30 also may be able to use the federal First-Time Home Buyer Tax Credit, which can be worth up to $8,000. Despite the name of the program, the tax credit can be used by qualified buyers who have not owned a home during the last three years.
Home buyers and homeowners who want to refinance an existing mortgage should always shop around and compare loan offers. Borrowers should consider and compare loan fees and costs as well as interest rates before they select a specific loan that will meet their individual needs.