By John W. Schoen Senior producer
updated 7/20/2011 3:09:20 PM ET 2011-07-20T19:09:20

The threat of a debt default by Greece and other European countries has created financial turmoil for investors, banks and government officials. It’s also provided a boon to U.S. homeowners.

Long-term mortgage rates have been drifting to their lowest levels of the year, sparking a new wave in mortgage refinancing activities, industry experts say.

The reason? Despite the anxiety over debt talk brinksmanship in Washington, investors have been flocking to dollar-based investments including U.S. Treasuries, because euro-based securities seeem riskier. Even as a potential U.S. default looms, the odds seem lower than a default in Europe. It’s like living in the nicest house in a bad neighborhood.

Investor fears about Europe were stoked again Wednesday after the head of the European Commission gave an an unusually somber warning to EU leaders, saying that if they don't find a convincing solution to Greece's debt crisis at Thursday summit, the global economy will pay the price.

Story: EU warns of economic damage if Greece summit fails

The investor "flight to safety" into dollars has forced up prices of Treasuries, which pushes interest rates lower. For homeowners looking to refinance their mortgage, there are fresh bargains available. As of last week, the average rate on a 30-year fixed mortgage had fallen to just 4.54 percent.

Story: Homebuilding leaps, led by condo construction

"Ongoing turmoil in the financial markets primarily due to the sovereign debt crisis in Europe has brought mortgage rates back to their lowest levels of the year," Michael Fratantoni, vice president of research and economics at the Mortgage Bankers Association said in a statement. "Refinance applications have surged in response."

The MBA’s mortgage application index, which tracks both refinancing and home purchases, spiked up 15.5 percent in the week ended July 15. That’s the biggest increase since early March. The index for refinancing applications soared 23.1 percent.

Those refinancings are helping homeowners lower their monthly payments and free up a little more cash to pay bills. Mortgage payments made up just under 10 percent of household debt in the first quarter, down from 11.3 percent when the recession began in 2007. (Some of that drop is the result of homeowners who lost their homes and no longer have a mortgage.)

But unlike the days of "cash-out" refinancings during the housing boom, there's little home equity left to cash out. With home prices down one-third from their peak and still falling, roughly one in four homeowners have no equity at all. At the height of the mortgage mania in 2006, American households scooped nearly $350 billion out of their houses by refinancing and taking out home equity loans. In the year ended in April, that had fallen to less than $60 billion.

The drop in mortgage rates has done little to revive sales of new and existing homes. Bankers are still very choosy about approving loans for home buyers, and consumers have gotten more nervous about buying as the job market and economy have weakened.

Story: Home sales on track for worst year since bust

Sales of previously-owned homes fell more the forecasters had expected in June hitting a seven-month low and extending a dismal spring selling season. More troubling was a surge in cancellations of pending contracts as home buyers found themselves unwilling or unable to close on their purchase. Some 16 percent of buyers backed out of their contracts in June - up from 4 percnt in May.

More on real estate:

Viva Las Vegas, indeed, at this home

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 3.79%
$30K home equity loan FICO 4.99%
$75K home equity loan FICO 4.69%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.83%
Cash Back Cards 17.80%
Rewards Cards 17.18%