Falling interest rates are leading to a rush to get cheaper mortgages. Should you join in?

NEW YORK (CNNMoney.com) -- Falling interest rates are fueling a mortgage refinance frenzy as homeowners rush to reduce their housing payments.
The average rate for a 30-year, fixed mortgage dropped to 5.08% last week, according to the Mortgage Bankers Association, more than a full point lower than just a month ago.
Mortgage applications were up a whopping 48% last week, according to the MBA and more than 80% were from homeowners looking to lower housing costs.
"It's snowing loans," said Steve Habetz, a Connecticut mortgage broker, "and they're all refis."
Among those were Elizabeth Mayer and Michael Keohane, who bought their Manhattan condo just a little over a year ago, financing $220,000 of the purchase price with a 30-year, fixed rate loan of 6.5%. That was affordable, with monthly payments of less than $1,400. But their new 5.25% loan will lower their payment to about $1,215, saving about $175 a month.
"It was a nice holiday gift," said Mayer.
With savings like that, it's no wonder that homeowners are coming out of the woodwork. And mortgage brokers are beating the drums too, advising their clients to let the good times roll.
Mayer said her mortgage broker had kept her informed of interest rate declines ever since she originally purchased her home. "He's been encouraging whenever opportunities arose," she said. "We missed one opportunity last spring when we just weren't able to act on it."
The broker made sure they didn't miss this chance. "He e-mailed me [about it] from South Africa and called when he got back," said Mayer.
Who should refi...
Anyone with high adjustable-rate loans. Folks in this group should try to get into a low fixed rate if they can. Not only will they lower their payments immediately but it would also eliminate the possibility of future increases.
Those who would lower their rate by a percentage point or more. Borrowers who already have a reasonable fixed rate shouldn't jump into a new loan every time rates inch down, according to Orawin Velz, an economist for the Mortgage Bankers Association.
"You should have at least a percentage point difference before you even think about it," Velz said. "If you have a 6.5% loan right now, it would be a great time to refi."
Waiting for a substantial rate decrease makes sense because getting a new mortgage incurs some expenses. There are the costs of a new appraisal and origination and application fees. Plus, a title search and title insurance are usually required.
All those costs, which can add up to $2,000 or $3,000 or more for a typical $200,000 loan, are often rolled back into the mortgage, increasing the principal upon which the interest rates are applied. If that goes up so much that it offsets the interest rate drop, it doesn't make sense to refi.
Those who are planning to stay in their homes for a while. The increased balances usually take a year or two to be wiped out by lower monthly payments, so anyone planning to sell the home during the next few years probably should not refinance, unless the difference in interest rates is very substantial.
The actual rate borrowers get depends, just as with purchase mortgages, on credit scores, income and assets and the value of the home.
"If you have a high credit score and your equity is good, it's like a vanilla cream puff," said Velz. "You're going to get a great rate."
Borrowers with significant equity in their homes. Many homeowners have had much of their home values erased in the post-bubble bust, eliminating much or all of their home equity - the difference between the value of the home and the amount owed on the mortgage.
If a refi borrower's home equity has fallen below 20% of the total appraised home value, the borrower will likely have to purchase private mortgage insurance. The insurance adds a point or two to the monthly mortgage costs, which turns a 5% loan into a 6% or 7% loan, erasing any advantage of refinancing.
"That's the biggest hurdle for refinancing right now," said Velz.
Borrowers who don't think rates will decline much further. Everyone considering refis has to decide whether to wait for interest rates to go even lower, which the Mortgage Bankers Association has been forecasting.
That's only a prediction, though, not a certainty. Rates could turn higher instead.
Borrowers must weigh the advantages of gambling on rates turning around or locking in savings at the present very low rates

Loan Derivatives Index Soars

April 25 (Bloomberg) -- A gauge of investor confidence in the U.S. leveraged-loan market is headed for its biggest monthly increase since being created last year as banks find ways to sell loans they have been stuck with the past 10 months.
The LCDX index is rallying as Citigroup Inc., Deutsche Bank AG and the rest of Wall Street whittle down their leveraged-loan liabilities to about $91 billion from a peak of $237 billion in August, according to Bank of America Corp. strategists led by Jeffrey Rosenberg in New York.
The LCDX Series 9, a credit-default swap index tied to the loans of 100 companies in the U.S. and Canada, has climbed 3.5 percentage points to 96.9, according to Goldman Sachs Group Inc. A newer version LCDX 10, used to hedge against losses or to speculate on the ability of companies to repay their debt, is up 2.1 percentage points to 99.1 since it started trading April 8.
``It's been quite a euphoric run for the market,'' said Alan Alsheimer, who trades the LCDX contracts at Goldman Sachs in New York.

MARKET COMMENTARYU.S. Treasuries fell, pushing two- year yields to almost the highest level in three months, as traders increased bets the Federal Reserve may be done lowering interest rates. Two-year notes declined for a seventh day before a planned $30 billion auction of the debt tomorrow. The Treasury Department will sell $8 billion of five-year Treasury Inflation Protected Securities today. The benchmark two-year Treasury's yield rose 3 basis points, or 0.03 percentage point, to 2.2 percent at 8:46 a.m. in New York, according to bond broker BGCantor Market Data. The price of the 1.75 percent security due in March 2010 fell 2/32, or 63 cents per $1,000 face amount, to 99 6/32. Ten-year yields rose 1 basis point to 3.74 percent. The yield on two-year notes, most sensitive to the outlook for interest rates, rose as traders see a 14 percent chance the Fed will keep its benchmark rate for overnight loans between banks at 2.25 percent on April 30, up from no chance a week ago. The odds are 86 percent the central bank will lower its target rate to 2 percent this month, futures on the Chicago Board of Trade show. A month ago, most of the bets were for a cut to 1.75 percent. The Fed has lowered its target rate from 5.25 percent since September as banks and securities firms around the world reported about $288 billion in asset writedowns and credit losses since the beginning of 2007.

The best place to buy a home these days
The 6 cities where home prices are likely to rise the most - or fall the least - in the next 12 months.

The Labor Department reported this morning that surging costs for energy and food worldwide pushed the March inflation reading at the producer level up 1.1% -- and up 6.9% on a year-over-year level – its highest mark since the early 80’s. Core producer prices – a value that excludes the more volatile food and energy components – rose a more modest 0.2% -- but on a year-over-year basis it is up 2.7% -- well above the Fed’s stated “comfort” zone and its highest annualized mark in more than a decade.

Tomorrow’s headline Consumer Price Index is expected to post a month-over-month gain of 0.4% while the core rate (a value that excludes the more volatile food and energy components) is expected to be 0.2% higher for the month. March consumer inflation numbers that fall below the consensus forecast for both the gross and core consumer inflation rates will probably prove to be supportive of steady to fractionally lower mortgage interest rates. Actual values that match or exceed market expectations for both components of the March Consumer Price Index will likely put some upward pressure on note rates as investors sharply reduce their expectations for more mortgage market friendly rate cuts from the Fed this year.

This weeks reports

This week brings us the release of seven relevant economic reports for the bond market to digest. We are also heading into corporate earnings season which could lead to fluctuations in the stock markets. If earnings come in lighter than estimates, the stock markets may fall, leading to an influx of funds into bonds. But, if earnings and forecasts are strong, the major stock indexes may rally, pulling funds from bonds and leading to higher mortgage rates. Some of the most influential companies don't report quarterly earnings for a few more weeks, but the early releases could affect optimism about what those big named companies' earnings will show.

Univ of Michigan Sentiment

12:17 ET 10-Yr: +21+/32..3.458%.. GNMAs: NA.. USD/JPY: 100.9500.. EUR/USD: 1.5817
Sentiment Says...: Trade is holding in near the best levels, but size has fallen off and the equity elves are up to their mischief again, trying to buy back into better territory. The session may be over however, with the volume having been sucked out and traders stepping to the sidelines. Global bonds are also catching a bid, with the German bund hanging at the best levels since the start of the month. The early GE news helped early while the terribly, terribly off sentiment measure was unable to add much to the bid as the negative whispers in advance took some of the sting out of the number (which hit at the worst levels since 1982. 1982.). The market will have some trouble pushing into much better ground, with the lofty, multi-year highs serving to weigh technically. While the weekend safe haven buying as well as a potentially less useless G7 going down will help to keep a floor under prices. The curve has been leaning steeper, but at a less steep inclination than earlier in the week with the 2-10-yr yield spread now running 171.7. UofM sentiment hit 26-yr lows while trade prices were lofty. The buck was a little offered on the sentiment downside miss but currencies are deferring to ranges mostly. Spot gold is off at 923.49 (-5.51) as is crude oil at 109.34 (-0.77).