Interest rates are at an all-time low, sending many people to banks to refinance their homes

Monday, May 21, 2012
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Interest rates are hovering at record lows, prompting many homeowners to consider refinancing their mortgage loans. That may be a wise idea, say local bankers, and they expect rates to remain low for the foreseeable future.

"Anyone who has a higher mortgage rate or car loan rate or home equity loan rate might want to consider refinancing right now because interest rates are at historical lows, and it only makes sense to take advantage of the low interest rate environment of which we are a part of," says Roger Tolliver, community bank president at Commerce Bank in Cape Girardeau.

The Federal Reserve has indicated rates will remain low throughout this year and next and possibly into early 2014, notes Tolliver. Based on those comments, and the general feeling of economists and the stock market, Tolliver believes rates really will stay low for the next couple years -- and that's good news for homeowners as well as the economy as a whole. The government understands that when people pay less on housing expenses they have more disposable income to purchase other items, which should strengthen the economy, says Jeanne Churchill, assistant vice president and loan officer at Capaha Bank in Cape Girardeau.

"Customers can save serious cash over the term of their loan. I have refinanced many loans that saved enough money to send a child to college," says Churchill. "Beyond that long-term savings, people then have the extra money in their monthly budget to allocate to other projects or goals. With lower interest rates, businesses have the opportunity to finance growth at low rates, too."

Freddie Mac reported May 3 that the average rate on a 30-year fixed-rate mortgage fell to 3.84 percent, down from 3.88 the week before and 4.71 percent a year ago. Rates for a 15-year fixed-rate mortgage are at 3.07 percent, down from 3.12 the week before and 3.89 a year ago. As such, refinancing made up about 75.2 percent of mortgage activity in April 2012, according to the Mortgage Bankers Association.

So why the drop in interest rates? Kevin Greaser, community bank president at Alliance Bank in Cape Girardeau, says it has to do with a weak economy in the United States and around the world.

"It is likely that we need to see an increase in private sector spending and fairly significant job creation for interest rates to increase," he says. "There is really no way to tell how long rates will remain this low. We would advise anyone to review their mortgage rates now because we think it more likely to see rates go up than down much further."

Interest rates are driven by investors' confidence, supply and demand, and government treasury rates, explains Churchill. Banks purchase a "pool" of mortgage loans and lump them together in a trust, which then secures the pool by issuing mortgage-backed securities from companies like Fannie Mae and Freddie Mac. These companies have guarantees that they are backed by the federal government, says Churchill, which makes mortgage-backed securities a pretty safe investment.

"As demand for this type of investment increases, interest rates are lower. In a strong economy, there are more lucrative options for the money that investors have to manage and therefore interest rates on mortgages increase. Less demand in the market calls for higher rates," says Churchill. "The government's treasury rates have a direct correlation with mortgage interest rates and as long as the treasury rates remain low, so will interest rates for the average consumer."

John Thompson, president of The Bank of Missouri, says a major reason for the low rates is the federal government's position on inflation and keeping it in check.

"Low interest rates can be an incentive for the business sector to borrow with their need to grow and expand," he says. Homeowners who can refinance and lower their loan rate 1 percent and intend to remain in their home five more years or longer may be good candidates for refinancing, he says.

Bankers agree that homeowners should speak with an experienced mortgage loan originator about the possibilities and determine whether refinancing makes sense, and to ensure that they will actually save money by refinancing. The size of the loan, how many years are left to pay, and recording, appraisal and closing costs are all things to consider, says Tolliver.

"If you can refinance and recover the costs within the first year then it makes sense (to refinance)," says Tolliver.

The magic number seems to be 1 percent: If you can improve on your interest rate by about 1 percent, it might be worthwhile to refinance, says Greaser and Tolliver.

Adds Churchill, "If you have only a small amount of time left to pay on your loan, you may not be the best candidate, but any opportunity is worth the investigation."

Growing confidence in the stock market, a lower unemployment rate from this time last year and increased retail sales indicate that the economy is improving, say Thompson and Churchill, which is good news for the length of time interest rates will remain low.

"The other major factor is that we are in an election year," says Churchill. "No one on either side of party lines wants to poke that sleeping dragon right now. I would not anticipate seeing any substantial increase in rates in the near future."

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