Low mortgage rates are enticing more homeowners to apply for a mortgage refinance. Mortgage loan application volume rose 13% for the week ended Aug. 13, 2010, compared with a week earlier, according to the Mortgage Bankers Association (MBA). The MBA’s Refinance Index jumped 17% from the previous week.

Many homeowners are jumping at the chance to refinance as the 3o-year fixed-rate mortgage has fallen to an average of 4.6% and 15-year home loans are at 3.99%. With rates so low, here are a few things to consider if you are trying to decide whether or not to refinance.

• How long will it take to recoup any closing costs associated with refinancing? The longer you plan to stay in your home after refinancing, the better off you’ll. Have your mortgage broker run the numbers to find the break even point for refinancing.
• Do you have an adjustable-rate mortgage (ARM)? There are plenty of people out there who still have ARMs that are scheduled to reset at a higher rate at some point. Mortgage rates are low now, but think about whether or not you’ll be able to afford the monthly payments when rates start to climb again.
• Do you have enough home equity to refinance? It doesn’t matter how low mortgage rates are if you are underwater on a home loan. Unless you qualify for the government’s program to help distressed homeowners — which has had lukewarm results — it will be tough to get a mortgage lender to approve a refinance.

Even if you don’t qualify for a home refinance right now continue to make your monthly housing payments on time each month to avoid problems. Not only will you avoid foreclosure, but a as the housing market recovers you may find yourself in a better position to get approved for refinancing down the line.

Are adjustable rate mortgages “bad”?

No.

No, they are not.

There is nothing inherently bad about an adjustable rate mortgage — regardless what you may have seen on the evening news recently.

There are all kinds of adjustable rate mortgages: 3/1, 5/1, 7/1, 2/28 — just to name a few. And each loan product has a different use for a different person who may be in a different situation.

And generally speaking, the only time I have seen an adjustable rate mortgage be “bad” is when a homeowner gets into an adjustable rate without understanding the risks associated with the loan. Occasionally, I suppose that the 2/28 adjustables could be argued as “potentially bad” but there isn’t really anything “bad” about them for someone who understands them.

Now.

The reason I bring up the fact that there isn’t anything really bad about adjustable rate mortgages is that the 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.97 percent according to the latest Freddie Mac press release, with an average 0.7 point, down from last week when it averaged 4.00 percent. A year ago, the 5-year ARM averaged 4.90 percent.

“Treasury bond and note yields declined this week, and rates on fixed-rate mortgages and hybrid ARMs followed suit,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Rates for both the 30-year and 15-year fixed-rate mortgages were the lowest in six weeks; initial rates on 5/1 hybrid ARMs hit an all-time low since they were added to the survey in the beginning of 2005.

With rates this low, are adjustable rate mortgages “bad”?

Only if you don’t know what you are getting yourself into.

By now, hopefully everyone knows that mortgage rates are not determined by the Federal Funds rate – they are determined by the market of buying and selling mortgage bonds.

If you still think that Ben Bernanke sets the mortgage rates by announcing the Fed has raised or lowered interest rates… sorry to break your heart, but it isn’t true.

But recently, the Fed has been buying mortgage bonds – between 10 and 20 billion each week — and that has helped the interest rates on mortgages stay low.

And the program that has allowed the Fed to buy mortgage bonds is coming to an end after spending somewhere around 1.2 trillion over the past year or so.

Experts generally agree that it means the mortgage bond market is going to adjust in a way that results in increased interest rates on mortgages.

Which means that you can reasonably expect mortgage rates to rise this year – although no one can tell you for sure how much they expect them to rise. Some experts say that they may rise only slightly, others say that a 2% jump is not out of the question.

According to the SF Chronicle:

Julian Hebron, branch manager at RPM Mortgage’s San Francisco office, anticipates a bump up to around 5.5 percent by summer with rate volatility all year.

“The Fed isn’t going to start dumping mortgage bonds on April 1, they’re just going to stop buying,” he said. “By that time, improving economic data is likely to push the Fed toward a rate hike bias. This will contribute to higher mortgage rates, slowing refi activity, and less mortgage bond supply. So while the Fed won’t be buying anymore, rates shouldn’t spike immediately because there will be less supply for markets to absorb.”

Christopher Thornberg, principal at Beacon Economics in Los Angeles, thinks the Fed’s withdrawal will have a radical impact.

“Clearly, when they stop printing all that money, it’s going to be a shock to the system. I have to assume that when they pull back on it, it will cause a 100- to 200-basis-points rise” to rates of 6 percent or 7 percent, he said. “When they start selling off the stuff they purchased, which by my guess would come early next year, that would cause another 100- to 150-basis-points rise.”

But it is also possible that the Fed could step in and buy even more mortgage bonds than they the $1.2 (or so) trillion that they have already bought and in his Congressional testimony released last week, Chairman Bernanke said the Fed eventually will take steps to forestall inflation that also are likely to result in higher interest rates for all loans.

So it remains to be seen exactly what the impact of the Fed discontinuing the mortgage bond buying program – but if you are planning your home financing options, you may want to remain on the safe side and expect higher rates coming soon.