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Low Rates Spark High Interest in Refinancing and Homebuying

December 15, 2009 - PORTLAND -- With a 30-year loan and interest rate above 6 percent on their Cape Elizabeth home, Catherine and Charles Rich had been keeping a close eye on the mortgage market. And when rates began to slide earlier this fall, they decided to refinance. The couple locked in a 20-year loan at 5 percent, saving $400 a month in payments.

Then they turned their attention to an apartment building they own in Portland. It had a 30-year loan above 6 percent. The Riches were able to grab a 15-year mortgage at 4.3 percent, with essentially the same monthly payment.

"We saved a fortune in interest over the life of the loans," Catherine Rich said. "We were very fortunate."

Statewide, people who own homes, and people who want to buy them, are taking advantage of some of the lowest mortgage rates on record.

Lenders report a steady stream of refinancing, and continued activity from first-time homebuyers who are combining these low rates with extended government incentive programs. For people who can qualify, the rates offer a way to dramatically improve their personal finances during the economic downturn.

Not everyone who wants to can benefit from the historic rate environment. People who bought a home over the past few years, for instance, may find that falling values have erased the equity they need to refinance. Hopeful buyers also may find themselves shut out by stricter lending standards.

Even so, lenders say now is an excellent time to at least explore the potential.

"We're seeing a surge in the past week of people coming in to talk to us," said Julie Marquis, chief operations officer at Five County Credit Union in Bath.

Everyone's financial situation is different, but lenders suggest a few things to consider, especially for refinancing.

The current spread in interest rates has pushed down 15-year mortgages to very low levels. So it may be possible to convert a higher-rate, 30-year loan to a 15-year one and still have monthly payments in the same ballpark.

Marquis compared 30-year and 15-year loans on a $150,000 mortgage, and she found the 15-year loan would cost $283 more each month, assuming certain interest rates. For that extra money, a homeowner converting to a 15-year loan could knock off roughly $90,000 in interest payments that would have been due over time on the 30-year mortgage, Marquis figured.

Some owners are happy just to lower the monthly payments on their fixed-rate, 30-year mortgages. For homeowners with variable-rate mortgages, now's the time to lock in, Marquis said. Rates aren't likely to go much lower, and at some point, they will rise again.

Lenders differ about how far someone's mortgage rate should drop to make it worthwhile to refinance. They all agree, though, that an owner must plan to live in the house long enough to pay back closing costs. That can take one to three years.

Refinancing can make sense even with a 1 percent rate drop, said Tony Armstrong, president of Maine Home Mortgage Corp. in Portland. Trimming $2,000 in interest payments on a $200,000 mortgage, for instance, will pay for the typical $2,000 worth of closing costs in the first year.

Armstrong estimates that 70 percent of his business these days is refinancing. During a dip in the market five years ago, many of his clients had already locked in to very low rates. But others are just now tuning in.

"There are still a lot of people who don't know the rates are this low," Armstrong said.

Interest rates change daily, and they saw a slight uptick early last week. But in the first week of December, Bankrate.com noted that the benchmark 15-year fixed-rate mortgage had fallen to 4.46 percent, the lowest point since the company began keeping weekly records in 1985. The 30-year benchmark had risen one-hundredth of a percent off the record, at 5.01 percent.

Some owners who want to tap into these rates to refinance are disappointed, however.

Lenders typically won't lend more than 80 percent of the home's appraised value (an 80 percent loan-to-value ratio). But people who purchased their homes at the peak of the bubble may find the property has lost so much value that they can't borrow the amount they need without paying mortgage insurance.

"We've run into that quite a bit this year," Marquis said. "These people can't refinance because they're underwater. We've seen appraisals that are $30,000 to $40,000 less than they were a few years ago."

The housing market also is benefiting from low rates. Sales already had gotten a boost earlier this year from the $8,000 federal tax credit for first-time homebuyers.

That credit, which was due to expire last month, was extended until the end of April. And the program was expanded to offer a $6,500 credit for homebuyers who have owned a home for five of the past eight years. The goal is to entice "move up" buyers into their next homes.

Some of this activity could be dampened if the government clamps down on lending requirements at the Federal Housing Administration, which insures nearly one in four mortgages. With down payments of as little as 3.5 percent, FHA loans have come under fire for taking too big a risk with taxpayer money.

So far in Maine, though, lenders say the combination of low rates and extended state and federal loan programs has lined up to present a rare opportunity for buyers.

At Northeast Bank, six out of 10 mortgages this year were purchases, not refinancing. Half were first-time homebuyers. The bank wrote $21 million in mortgages in October, $12 million of which was for purchases, according to Marcel Blais, the bank's chief operating officer.

With prices down and rates expected to stay relatively low into early 2010, the bank plans to hire 10 new workers to help generate mortgage business, Blais said.

"You put all these things together," Blais said of the tax incentives and low rates, "and we're seeing an uptick in purchasing. That's a good thing."

By TUX TURKEL, Staff Writer, Portland Press Herald, December 14, 2009


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