Loan demand falls in spite of record low mortgage rates

According to the industry reports, the mortgage rates have fallen to a record low in February, 2010. The average rate on a 30-year fixed rate mortgage was 5.15% thus making it easier for the consumers to buy a property. However, the rate of interest is slightly higher than the rate (5%) recorded in the month of November last year (2009).

Low mortgage rate – How it benefits a borrower

The 5.15% interest rate means that a borrower will have to pay a monthly interest of $530 for every $100,000 he/she takes out as a home loan. In addition to this, if you pay 1 or 2 points, then the interest can be further reduced to 4.5%. So, you’ll have to pay only $507 as interest for every $100,000 principal amount borrowed.

Fall in mortgage loan demand – The statistics

Despite the record low mortgage rates, the demand for mortgage loan has not increased in the month of February, 2010; instead, the loan demand has fallen further. According to the ‘Mortgage Bankers Association Weekly Application Survey’ report released on February 24, 2010, the mortgage applications in the week ending in February 19, 2010 fell about 8.5%. The demand for refinance loans was 8.9% lower and the purchase demand also declined to about 7.3%.

Fall in loan demand – Probable reason behind it

One of the main reasons behind the fall in loan demand can be attributed to the fact that the homeowners have already taken advantage of the low mortgage rates.  They have refinanced their mortgage loans in order to make the monthly payment affordable.

Mortgage rates – Will it continue to decline further?

According to industry experts, the mortgage rates can rise as the Federal Reserve is about to end its campaign of flooding the market with funds in order to help the economy to recover from the economic recession (2007-2009). As per industry reports, the Federal Reserve has already purchased about $1.25 trillion worth of residential mortgage loans that were originated by the finance companies and the commercial banks at record low rates. So, if the Federal Reserve starts purchasing fewer mortgages, then the private investors will have to purchase more, which may increase the interest rate on 30-year fixed rate mortgage to about 6%, in the near future.

The lending institutions have already tightened the eligibility criteria to offer a mortgage loan. So, the borrowers will need to have a good score (of about 720) to qualify for a conventional mortgage loan. A borrower with FICO score below 720 will have to get an approval from the government as it will have to guarantee the repayment of the mortgage loan.