Is the era of super-low interest rates coming to an end?
Long-term rates, including those for mortgage loans, have jumped more than half a percentage point since the beginning of May and the prospect that they may only go higher is driving both consumers and businesses to borrow while interest costs remain near rock bottom. Local bankers and mortgage brokers say homeowners who have dawdled over refinancing have gained a sense of urgency as mortgage rates have climbed to the highest level in more than a year.
“There’s definitely been a change in the last month in customer behavior,” said Elizabeth Worrick, senior vice president with Boston Private Bank & Trust Co. “There’s a little bit of a frenzy on the refinancing side.”
The average rate for a 30-year mortgage nationally was 3.35 percent in the beginning of May; by last week it had risen to just under 4 percent, according to Freddie Mac, the government-controlled mortgage company. That’s still historically low, but anticipation that rates are on the way up is causing anxiety among some borrowers who fear they may have missed the bottom.
“We’re still getting calls from people who are in sixes,” said Amy Tierce, the regional vice president of Fairway Independent Mortgage in Needham. “And now this is a kick in the pants.”
When Chris Donovan, a high tech recruiter, noticed that the reliably low interest rates, which have been a hallmark of this recovery, started creeping up, he decided he couldn’t wait any longer to refinance his South Boston rental property.
Donovan and his wife ditched their adjustable-rate mortgage and last week locked in a 30-year loan at a fixed 4.75 percent, which is higher than a typical mortgage because it is for an investment property.
“For us, it was about long-term stability,” said Donovan, 40, who lives in West Roxbury with his wife and two children.
And it’s not just homeowners who are looking to lock in low rates. Liberty Mutual recently said it would issue $600 million in bonds to pay down debt incurred at higher rates and finance general business needs, said John Cusolito, a spokesman for the company.
“The current favorable rate environment played a principal role in our decision,” Cusolito said, comparing the process to refinancing a house.
The recent rise in interest rates has been driven by two factors, economists said. The first is an improving economy that is convincing investors to move their money out of safe, but low-paying bonds, such as US Treasurys, into riskier investments with bigger returns. When demand for bonds weakens, the interest they pay rises as a way to attract investors.
As a result, rates on 10-year Treasurys, to which many long-term loans are tied, have risen to 2.2 percent from 1.66 percent in early May.
The improving economy has also driven speculation on when the Federal Reserve will end the bond-buying program it undertook to push long-term rates lower and stimulate the economy. Recent signals from policy makers that the Fed could begin to reduce those bond purchases, now at $85 billion a month, have also contributed to rising long-term rates.
Fed officials are meeting in Washington to assess the economy and consider changes to their policies. Federal Reserve chairman Ben Bernanke holds a press conference Wednesday, which investors, mortgage brokers, and realtors will be watching for any signs of a potential pullback in the bond-buying program later this year.
Paul Edelstein, an economist with IHS Global Insight in Lexington, said he doesn’t expect any major shifts in the central bank’s policies. Fed officials have said they will continue their aggressive stimulus policies until the unemployment rate drops to 6.5 percent. The national jobless rate was 7.6 percent in May.
“I’m not convinced that they’re ready,” Edelstein said about the Fed changing course.
Ultimately, economists say, rates have to go higher. And as they rise, they will put a damper on the refinancing boom.
Refinancing accounted for 69 percent of mortgage applications nationwide last week, according to the Mortgage Bankers Association. Refinancing averaged 74 percent of mortgage activity during the first three months of 2013, according to the association, which surveys its members weekly.
“Interest rates are the number one driver of refinances, so as rates continue to climb, there will be less incentive for homeowners to refinance,” said Mike Frantantoni, vice president of research and economics at the association.
The expectation in the industry is that home buying will pick up some of that slack as the economy strengthens, incomes rise, and consumer confidence improves.
But some homeowners are worried that rising rates will make it harder for them to sell. Gary Rogers, the broker/owner for Re/Max On The Charles, said one of his clients wants to sell a starter home and decided to put it on the market before rates climb much higher.
At the current rates, the monthly mortgage payment is affordable for a potential buyer who is spending about $1,600 a month on rent, Rogers said. But if rates continue to rise and push the payments up another $200, some buyers may take a pass, Rogers said.
While long-term borrowing rates are rising, ultra-low savings rates aren’t following. The reason: Interest paid on savings is tied to the Fed’s benchmark short-term interest rate, instead of the bond market.
The Fed has held that rate near zero since the end of 2008 and is expected to keep it there for the foreseeable future.
“It does hurt the savers,” said Jon Skarin, a senior vice president with the Massachusetts Bankers Association.