As the stock market bounced up and down, the rates on new home mortgages fell.  According to Federal Home Loan Mortgage Corporation, also known as Freddie Mac, last week 15-year fixed rate mortgages (15-yr FRM) fell to 3.50%, which is a record low, down from 4.69% just two years earlier.   In fact, all mortgage rates were close to their record lows with 30-year fixed rate (30-yr FRM) loans dropping to 4.32%, down from  5.22% two years prior; 5-year adjustable rate mortgages (5/1-yr ARM) dropping to 3.13%, down from 4.80% two years ago; and 1-year adjustable rates mortgages (1-yr ARM) dropping to 2.89%, all the way down from 4.82% two years earlier.

Does it make sense to refinance?  It does if your current  rate is much higher than the prevailing rate, and according to the USA Today article of August 13^th, “Mortgage Rates Reach Record Lows, Sparking Refinancings,” more that 63% of all homeowners have mortgages that carry an interest rate above 5%.  The problem faced by many of those who would like to refinance is that most banks limit the amount of the home mortgage to 80% of the value of the home, and many homeowners don’t have enough equity in their home to allow them to refinance.  In fact, about 46% of homeowners with mortgages have less than 20% equity in their homes.

When homeowners can refinance, what type of mortgage are they drawn to?  The answer is — mortgages with shorter terms.  In the first quarter of 2011, 34 percent of homeowners with 30-year mortgages refinanced with 15 or 20 year mortgages.  By simply refinancing at the lower rate they were able to keep their payments at the same level, lower the maturity of their mortgage, to 15 or 20 years instead of 30, and therefore pay off their mortgage much earlier.

Discussion questions:

1. If you or your parents have a mortgage, do you know what its maturity is and whether it is a fixed or variable rate mortgage?
2. If you were to take out a $150,000 mortgage today at the rates listed in Freddie Mac’s most recent Weekly Primary Mortgage Market Survey, ignoring any points, what would your monthly payments be under each of these mortgages?
3. Take a look at the average monthly interest rate since 1980, how high were rates then?  What has happened to rates, and why do you think that might have happened?