Refinance applications for mortgages fall

Refinance applications drop, partly because of a slight rise in interest rates. But the math behind refinance applications also plays a role.

Applications for new mortgages fell to their lowest level in nearly 15 years, despite depressed home prices and near-record low interest rates, according to a new report. Refinance applications dropped as well.

Overall mortgage volume decreased 2.4 percent last week, the Mortgage Bankers Association reported Wednesday.

Why aren't more homeowners and would-be homeowners taking advantage of such low interest rates?

The MBA in a statement blamed the fall on "volatile markets and rampant uncertainty," which kept home purchasers on the sidelines.

A slight rise in mortgage interest rates caused refinancers to pull back as well. The average rate for a 30-year fixed mortgage rose from 4.32 to 4.39 percent with a slight increase in points, while the average for a 15-year fixed mortgage increased from 3.47 to 3.56 percent with a slight decrease in points.

The other challenge for homeowners wanting to refinance is the law of diminishing returns: The lower interest rates are, the bigger the drop needed to make it worthwhile to refinance a mortgage.

For example, a drop from 6 percent to 5 percent on a $200,000 mortgage saves homeowners about $126 a month. Over 16 months, that would allow them to save $2,000 to defray refinancing costs. But a drop from 5 percent to 4 percent saves homeowners only $119 a month, requiring almost an extra month to save the same $2,000.

If interest rates were to fall, say, another half a percentage point, refinance applications would be sure to surge. Many homeowners would still find refinancing worthwhile. But the savings they realize – as well as the pop that extra money gives to the economy – is diminishing as interest rates fall.

It's simple math.