Bleak Economy Has Upside for Homeowners

Volatile markets, the subprime housing crisis, drops in retail sales and disappointing fourth-quarter earnings all paint an awfully bleak picture.

But believe it or not, there is a bright side to the economic doom and gloom: Interest rates on home mortgages have fallen to near-record lows and homeowners are starting to take advantage of it.

"It's really served up a tremendous opportunity for homeowners looking to get out an adjustable rate loan or another mortgage that no longer suits their needs," said Greg McBride, senior financial analyst at

The Mortgage Bankers Association reported yesterday that refinance applications are up 92 percent since the beginning of November while the average interest rate for 30-year fixed-rate mortgages decreased to 5.49 percent.

"We're not surprised," said Mortgage Bankers Association chief economist Doug Duncan. "A lot of folks are shifting from adjustable [rate mortgages] to fixed rate and what they're doing is locking out the upside risk that interest rates might rise in the future."

Rick Spears has witnessed the refinance spike firsthand. Spears, the president of Prodigy Mortgage Corp., local broker in Nyack, N.Y., said that the number of homeowners asking to refinance with his firm are up 30 percent to 40 percent over this time last year.

"We're a little understaffed right now to handle it," he said. "We have people putting in longer hours."

McBride said that the last record low on 30-year-fixed rate mortgages was 5.28 percent in June 2003.

Contrary to popular perception, the dropping mortgage interest rates are not directly related to Tuesday's Federal Reserve cut to its federal funds rate. A weak economic outlook overall and increased investment in so-called safe havens such as U.S. Treasury bonds drive mortgage rate decreases, McBride said.

Nonetheless, the Fed rate cut has apparently raised consumer awareness of dropping home loan rates.

Penn Johnson, at Stanford Mortgage Co. in Connecticut, said that the company fielded dozens of phone calls from borrowers inquiring about the Fed rate cut and mortgage interest rates.

"You have to explain that we've really had an improving rate since the summer," Johnson said.

Not everyone will be able to take advantage of the low borrowing rate, experts said. Refinancing will be harder for homeowners behind on mortgage payments or those who owe more than their home is worth to refinance, McBride said. Lending requirements, he said, are tighter these days.

"The only requirement to borrow a lot of money for several years was that you have a pulse," McBride said. "And now the pendulum has swung away from the easy credit, back to more traditional guidelines around credit, income, debt ratios and down payments."