The Mortgage Bankers Association (MBA) reported that applications for a mortgage refinance rose by 26.4 percent during the week ending January 13, 2012 compared to the previous week.

The MBA’s Refinance Index reached the highest level since August 8, 2011 and the refinance share of mortgage applications rose to 82.2 percent.

“Interest rates dropped last week due to continuing anxieties regarding the fragile economic situation in Europe,” said Michael Fratantoni, MBA’s vice president of research and economics.  “With mortgage rates reaching new lows, refinance volume jumped and MBA’s refinance index reached its highest level in the last six months.”

According to HSH.com, the average rate for a 30-year fixed-rate home loan was 4.19 percent. Mortgage rates for all loan types reached record lows during the week ending January 13.

HSH.com anticipates that interest rates will rise by about an eighth percentage point or more in the next few weeks or that fees will rise for mortgage borrowers due to the decision by Congress to raise the cost of the mortgage guarantee fees imposed by Fannie Mae and Freddie Mac.

Refinancing and ARM analysis

Adjustable rate mortgages (ARMs) also reached record low mortgage rates last week and a recent analysis by Freddie Mac of ARM activity in 2012 shows that initial-period rates on ARMs were at the lowest levels recorded in the 28-year history of the ARM pricing survey. In early January 2012, the interest rate savings for the popular 5/1 hybrid ARM compared to the 30-year fixed-rate mortgage amounted to about 1 percentage point, about the same as during January 2011, according to Freddie Mac.

Frank Nothaft, vice president and chief economist of Freddie Mac, said, Homebuyers have shied away from ARMs, particularly traditional 1-year ARMs, because they are wary of the risk and uncertainty.  The potential for much larger payments if future shorter-term interest rates are significantly higher and the high delinquency rates that borrowers have experienced with ARMs in recent years have led consumers to prefer fixed-rate loans over ARMs. In addition, fixed-rate loans currently are at near historic lows, and initial ARM rates are only slightly lower than fixed-rate loans.”

If you are considering refinancing and know you will sell your home or pay off the loan balance during the initial fixed-period of an ARM, this could be a loan product worth considering.

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