So those qualifying for these ultra-low rates must have pretty spotless credit histories and a pretty significant chunk of equity. That excludes anyone underwater or even slightly above water. And unfortunately, they're the ones who would benefit most by refinancing. According to real estate analytics firm CoreLogic, about three-quarters of underwater borrowers have mortgage interest rates above 5.1%.

A Small Universe of Borrowers

A few weeks ago, I received an e-mail from someone who works for a title insurance company who sees hundreds or refinances per month. This person told me that there's a small group of borrowers who continue to refinance each time rates drop significantly. Other borrowers fail to qualify.

These pristine borrowers are seen as having virtually no risk. They're relatively affluent, live in neighborhoods where home values are stable, and have spotless credit histories. Through brokers or banks directly, they are notified that they qualify for refinancing. Meanwhile, other borrowers aren't receiving such offers. Some of them may qualify, but they aren't being actively pursued for refinancing.

If You Can Get a Fixed Rate Mortgage

The other problem, however, is that mortgages at rates this low aren't particularly attractive to banks and investors. At fixed rates below 4%, 30 years begins to look like a very long time. We all know that interest rates are going to have to rise eventually. When they do, investors won't want to be locked into such low interest rates, since they will be able to invest in debt that provide significantly more interest at that time.

That's why we're beginning to see more adjustable-rate mortgages being sold again. They protect banks and investors from facing a very low fixed interest rate for the next 30 years. Through June, while interest rates were relatively low, ARMs accounted for 13.4% of the total mortgage market. That might not sound like much, but it's up from 9.5% in 2010 and 6.3% in 2009.

It wouldn't be surprising to see the portion of ARMs grow even larger in the second half of this year. In the first half, Freddie's the average weekly fixed interest rate for 30-year mortgages was 4.75%. Since July, the average weekly fixed rate has been 4.26%. That's about a 50 basis point drop, which might be big enough for yield-sensitive investors to demand more ARMs so they can benefit from the interest rate risk protection they provide.



So if you're looking to score a fixed interest rate near 4% on a 30-year mortgage, good luck. Right now, only a select few appear to be obtaining those rates. Others either don't qualify, can't get rates that low, or get adjustable-rate mortgages instead.

Image Credit: REUTERS/Daniel Munoz

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