Despite Low Mortgage Rates, Many Won't Be Able to Refinance

Thinking about refinancing to take advantage of record low interest rates? Be prepared for disappointment.

About 30% of refinancing applicants at LendingTree are unable to get approved at the interest rates that they expected because the value of their homes has dropped, according to Cameron Findlay, chief economist at Tree.Com (TREE), the parent company of LendingTree.com. The problem isn't surprising given the decline in the U.S. housing market since 2008.

"You want the correct underwriting to happen at the front end," says Findlay in an interview. "It's a qualification issue, not a rate issue."

Refinancing Options

Most LendingTree applicants are able to refinance to different loan types, which may be at higher rates or lower rates if they are adjustable rate mortgages. He estimates that less than 10% are rejected outright. Wells Fargo (WFC), the largest U.S. mortgage lender, declined to comment on its refinancing operations. "Wells Fargo does not release current data, so we don't have anything to add to your story," said Debora Blume, a company spokeswoman, in an email.

Mortgage rates at 50-year lows is starting to bring the real estate market back to life. Sales of existing homes increased 7.6% in April to a seasonally adjusted annual rate of 5.77 million units in April from an upwardly revised 5.36 million in March. Sales were helped by the federal tax credit, which has since expired. Existing home prices rose 4% to $173,100 in April, helping fuel a rise in consumer confidence.

"For people who were on the sidelines, there's been a return of buyer confidence with stabilizing home prices, an improving economy and mortgage interest rates that remain historically low," says Lawrence Yun. the chief economist of the National Association of Realtors, in a statement.

Inquiries Double as Rates Decline

Headlines about low interest rates are spurring people to see whether they can lower their interest rates and monthly payments. That means that times are busy for LendingTree employees. When interest rates decline 50 basis points over 30 days, the volume of calls and emails to LendingTree rises by about 100%, according to Findlay.

Some mortgage companies are adding people to cope with the added workload. Providence-based Citizens Financial Group recently hired more than 100 mortgage originators and plans to hire 100 more, according to Mortgage Daily.

To be sure, refinancing is worth the trouble under the right circumstances because the amount of reduction in a monthly payment can be significant. Jim Pair, the president of the National Mortgage Bankers Association, says that his office in Corpus Christi, Texas, has been "pretty busy" with refinancing applications. Many of the clients have tried refinancing before.

"In most parts of the country it has spurred purchases," he says. "Personally, I don't see that many come in who have not tried to refinanced in the past."