BANGOR, Maine — Gretchen Schaefer of Bangor has a really good reason to want to refinance her home right now — saving up for a second baby.
By taking advantage of the low mortgage interest rates that have become available in the last few weeks, she and her husband can save an extra $150 a month. By refinancing their mortgage rate from 6 percent to 4.75 percent, the couple can bank the extra money to pay for day care costs for a second baby.
“We’re just very frugal,” Schaefer, an instructional technologist at Husson University, said last week. “We figured this would be another way to start stocking up money for the concept of having a second child. Two in child care will be more than our existing mortgage payment.”
The couple should close on the refinancing of their McLaughlin Street home at the end of the month, and when they do they will join the soaring numbers of borrowers who have taken advantage of the historic drop in mortgage interest rates.
The rates have been falling since late November, when the Federal Reserve announced a plan to spend up to $500 billion to buy up mortgage-backed securities in efforts to buttress the distressed U.S. housing market.
The mortgage finance company Freddie Mac reported Thursday that average rates on 30-year fixed mortgages dropped to 4.96 percent this week, down from the previous record of 5.01 percent established last week. It was the 11th straight weekly drop, and way below the rate of 5.69 percent at the same time last year.
Rates are at their lowest since the company started its survey in April 1971, Freddie Mac said.
The average rate on a 15-year fixed-rate mortgage rose to 4.65 percent. That rate was 4.62 percent last week, the lowest point since June 2003, Freddie Mac said.
Rush to refinance
John Reed, president and CEO of Maine Savings Federal Credit Union and of Cuso Mortgage Corp., which handles mortgages for most of the states’ credit unions, said the volume of applications has been “incredible.”
“In the last three weeks, we’ve done almost 50 percent of what we did all of last year,” he said last week. “I think it’s a combination of the low rates — it’s something we’ve never seen in our lifetimes — and something that’s super for the consumer, who can save a ton of money.”
The mortgage refinancing rush is reminiscent of the 2003 finance boom, when low rates and looser regulations meant that mortgage brokers not backed by financial institutions proliferated in Maine, Reed said.
But there are differences. One is that the interest rates are even lower now. Another is that the weaker real estate market and tighter laws against predatory lending practices have contributed to the closing of many of those smaller firms, Reed said. Local financial institutions now are getting a larger piece of the refinancing pie.
“The reason we’re seeing such a huge increase is the local part of it,” Reed said. “That makes a big difference to people — they’re finally getting it. With all the upheaval in the financial services marketplace, people are saying, ‘We should deal locally.’”
Reed said that Cuso Mortgage Corp. sells its loans to Freddie Mac, but that loan servicing is done by local institutions.
Yellow Light Breen, senior vice president at Bangor Savings Bank, said his bank also has noticed a spike in refinancing applications since the interest rates started falling to record lows a month ago. Before mid-December, the bank averaged six or seven applications to refinance each week.
“It’s essentially quadrupled,” Breen said last week. “A lot of people with much higher rates ended up refinancing five years ago, during the boom period. Rates have to get to a pretty low ebb to get to a surge of interest in refinancing.”
Merrill Bank said it has seen a 60 percent increase in refinancing loans this month over the previous month. And TD Banknorth had a significant increase in residential mortgage refinance transactions in December and January, according to Steve Kaminski, senior vice president of mortgage products.
Breen also said that Bangor Savings Bank’s mortgage lenders have seen a “notable uptick” in new home purchases.
“Despite the typically slow period around the holidays, we had 20 new purchase applications in the week of Christmas and the week of New Year’s. In what’s generally a slow time, that’s pretty significant,” Breen said. “That’s certainly a favorable sign.”
Caution to borrowers
Borrowers should be aware that not everyone is eligible to refinance, lenders say. The low rates can be a great opportunity for borrowers with solid credit and plenty of equity in their homes, but those in danger of foreclosure are still sidelined, and defaults are expected to keep rising in the coming months.
“We have heard, at least in press reports, that there are people who come in for refinancing and they can’t, because [their eligibility is] tied to the value of their property,” said Chris Pinkham, president of the Maine Association of Community Banks.
Appraisers are making very conservative estimates of the value of a home, he said, and if the value is too low, the borrower may not have enough equity to qualify for refinancing. When this happens, it can be hard on would-be borrowers, who may feel that banks and credit unions just aren’t opening their coffers and lending.
“Those people complain that they can’t get a lower rate,” Pinkham said.
Home prices in Maine have dropped along with prices everywhere in the country — although declines have been less severe than in places such as California and Florida.
Median home sales prices here declined about 8 percent in November from the same month in 2007, according to the latest available figures from the Maine Association of Realtors. The median sales price means that half the homes were sold for more and half sold for less.
Schaefer, the borrower from Bangor, said she was happy, but not too surprised, that the appraiser found that her three-bedroom home actually had risen in value since she and her husband purchased it in 2004 for $120,000.
“I kind of expected that,” she said of the $146,000 appraisal. “It’s in a good neighborhood.”
Pinkham urged borrowers to shop around for their loans and ask brokers or bankers what the closing costs will be — and then compare the information in order to get the best deal.
“Shop and ask a thousand questions,” Pinkham said. “When you do a mortgage, the bottom line isn’t just the rate. It is the whole cost of the transaction. When you buy an appliance, you would shop around.”
The Associated Press contributed to this report.