Low mortgage rates make refinancing attractive

— -- The past few months have been lonely ones for mortgage lenders, but business is picking up. The phones are ringing, and banks don't have to give away doughnuts to attract customers. They've got something much more enticing to offer: rock-bottom mortgage rates.

Should you jump on the refi bandwagon? Unless you're already paying a low fixed rate, it's certainly worth considering, especially if you plan to stay in your home at least several more years.

Some borrowers may be tempted to hold out in hopes that rates will fall even more. But that's risky, says Bob Walters, chief economist for Quicken Loans. Long-term mortgage rates are near historic lows, he notes, which means they're more likely to rise than fall. The Federal Reserve reduced short-term rates by half a point last week and signaled that it might cut rates even more in the next few months. But while Fed cuts typically lead to lower rates for credit cards and car loans, the Fed doesn't influence long-term mortgage rates. These rates track 10-year Treasury notes, which tend to respond to changes in the economy.

In fact, "There are times when short-term rates go down and mortgage rates go up," says Jim Svinth, chief economist for LendingTree.com, a website that connects borrowers with lenders.

Long-term rates are particularly sensitive to any whiff of inflation, which causes bond yields to rise. If Congress approves an economic-stimulus package, Walters says, mortgage rates could move higher on fears that the stimulus will boost the inflation rate.

The bad news

Though mortgage lenders are hungry for business, credit standards have tightened. That means some borrowers won't qualify for the lowest rates, and some won't be eligible to refinance at all. To take advantage of low rates, you'll need: