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Mortgage rates may have struck bottom at last

Loan, refinance bargains wane as economy improves

By Todd Wallack
Globe Staff / April 1, 2012
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Homeowners and home buyers still waiting for mortgage rates to reach bottom may have already missed it.

The average rate for 30-year mortgages, which hit record lows in February, briefly rose above 4 percent last month for the first time since October, and many economists predict rates will continue to rise gradually as the economy and housing market recover. Freddie Mac, the government-backed mortgage company, forecasts 30-year rates will hit 4.5 percent by the end of 2012 and 5 percent by late next year, up from an average of just under 4 percent last week.

The higher rates will mean higher monthly payments for both homeowners who refinance their existing mortgages and home buyers taking out new ones.

In theory, rising mortgage rates could dampen demand for homes and slow the recovery of the long-suffering housing market. Higher rates also reduce the amount of cash homeowners have to spend on clothes, restaurants, and other expenses.

But economists and mortgage executives say the booming stock market, falling unemployment, and rising consumer confidence should encourage people to buy homes and spend money, muting the impact of higher mortgage costs.

“Things are feeling better,’’ said Frank Nothaft, chief economist of Freddie Mac. “Higher rates will have a little bit of an impact on housing demand, but that will more than be offset by the strengthening economy.’’

And despite the recent rise, lenders noted that rates still remain extraordinarily low by historical standards. Rates have averaged closer to 7 percent over the past two decades.

“Rates are still extremely low,’’ said Matt Vernon, a mortgage executive with Bank of America Corp., one of the nation’s largest lenders and the biggest bank in Massachusetts.

Mortgage rates have started climbing largely because they are linked to US Treasury bonds, which rise and fall with the economy and world markets. The interest the US government pays on the bonds that it sells to borrow money plummeted four years ago as the financial crisis drove investors to pour money into Treasuries and accept ultra-low interest rates to park their money in what is considered a safe haven.

But as US and European economies recover, investors are shifting their money to riskier investments with better returns. That means the US government has to offer higher rates on Treasuries to entice investors, which in turn drives up rates for mortgage and other loans linked to government bonds.

As a result, average mortgage rates have ticked up since hitting a record low of 3.87 percent in February. Freddie Mac reported that average 30-year rates rose to 4.08 percent in late March before settling at 3.99 percent last week.

Even this small increase may have already deterred some homeowners from refinancing existing mortgages. Refinancing volume has fallen 24 percent over the past six weeks, according to the Mortgage Bankers Association, a trade association in Washington.

“When rates go up, refinancing volume goes down,’’ said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association. “Many people no longer have the same incentive or interest in refinancing.’’

Some homeowners have decided to wait to refinance in the hope that rates decline further, said Ron Peck, senior vice president of the mortgage division at Salem Five Cents Savings Bank. Mortgage rates, like financial markets, fluctuate day to day, so some bankers said they could fall again before resuming their upward march.

One person opting to wait is Peg Rollins, who owns a home and auto insurance agency in Carlisle. She said Salem Five recently offered her a rate of 3.875 percent - a point lower that her current rate - but she decided to hold off.

“I hope it will drop to 3.5 percent,’’ said Rollins, 61, who owns a ranch home with a barn and horses in Carlisle.

Wayne Wong decided not to wait. Two weeks ago, he completed the refinancing of his four-bedroom Colonial in Westwood, cutting his rate from 5.5 percent to 4 percent and trimming his payments by about $100 a month. The mortgage company covered all the closing costs, so he did not have to shell out any cash upfront. And he cut the length of the loan from 30 years to 20.

“It was a win-win-win,’’ said Wong, a 43-year-old product manager for a software company. “It just made sense financially.’’

Despite the latest rise, lenders say it could still make sense for many homeowners to refinance. The average homeowner paid an effective mortgage rate of 5.18 percent in the fourth quarter last year, according to the Department of Commerce, more than a full percentage point above the best rates available today. The difference between a mortgage at 4 percent and 5 percent translates into an extra $178 per month for a $300,000, 30-year mortgage.

So far, there is no indication that the rising interest rates have deterred home buyers. Mortgage applications to purchase homes remained relatively stable nationwide, according to Fratantoni at the Mortgage Bankers Association. And many local bankers say purchase applications have surged with the spring home selling season, with buyers more interested in getting a good price than rock-bottom interest rates.

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.

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