Low rates incite refinancing

Every dollar counts in this economy.

Homeowners hustled last week to refinance their mortgages after interest rates fell below 5 percent for the first time since May.

Refinance applications climbed 18 percent from the previous week, the Mortgage Bankers Association reported Wednesday, as rates on 30-year home loans dropped to their lowest level in four months to 4.89 percent.

With extra cash lining their pockets each month, homeowners could help the economy recover. Since the recession began, American consumers have reined in spending, which accounts for up to 70 percent of the economy. A refinance savings of a couple hundred bucks could go a long way in boosting household finances.

"A lot of people are thinking: 'If I can get something right now, let's get it and run,' " said Pava Leyrer, president of Heritage National Mortgage in Michigan.

But more than 16 million homeowners owe more on their mortgages than their properties are worth. To refinance they would have to cover the difference and then some. In some cases, that could mean forking over tens of thousands of dollars. Others simply don't qualify under stricter credit and income standards. And requirements for refinancing certain government loans will get tougher in November.

The Federal Reserve started buying mortgage-backed securities in January to drive down mortgage rates. But it plans to slow its purchases of mortgage-related debt and extend the program through the first three months of 2010, which will likely push rates higher.

Still, current low rates helped borrowers like Kimberly Austin in Kalamazoo, Mich., cut her monthly payment by more than $300 to $934. Austin, a 40-year-old accounts receivable clerk, ticked off a list of where that extra cash will go. A new roof, updating the electrical system and other improvements on the older house she bought in June of last year.

"That money would be a huge help," said Austin, who is set to complete the refinance on Thursday.

She's a lucky one.

Many calls mortgage brokers received last week came from borrowers who couldn't qualify for a new loan because of lower incomes, higher credit standards or falling home prices.