The worries seem to be justified, according to recent data from the Mortgage Bankers Association. Mortgage refinancing applications jumped by 9.5% in the week that ended Sept. 15 from the week before. That continues a trend that began about two months ago, when mortgage rates began to decline from June 2006 highs.
Waving their ARMs
Many of those refinancings involve adjustable-rate mortgages. In every month from May 2004 to June 2006, adjustable-rate mortgages made up 30% to 35% of all mortgage applications, according to the Mortgage Bankers Association.
You can easily understand why so many holders of adjustable-rate mortgages would try to refinance. Three years ago, the monthly payment on a $200,000, three-year adjustable-rate mortgage at 4.25% would have been just $984; this year, the rate on that mortgage could well be 6.25% with a monthly payment of $1,212. In 2007, the rate could well be 7.4% and the monthly payment $1,354.
That's a projected increase of almost 40% in monthly payments for the holder of that mortgage. No wonder so many economists have predicted an economic slowdown as a result of a pullback in consumer spending due to higher mortgage payments, and so many financial market bears have predicted a collapse in the housing market as the most financially strapped homeowners are forced into delinquency and then foreclosure by higher mortgage payments.
The current dip in rates, however, would let that hypothetical holder of an adjustable-rate mortgage refinance with a fixed-rate mortgage at 6.25%, cap those monthly mortgage payments and avoid another hike in 2007. The more weeks that mortgage rates stay low, the more adjustable-rate mortgage holders will be able to refinance and the more likely it is that the housing market and the economy will be able to avoid a housing market bust.
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Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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