With Mortgage Rates So Low, Is Now the Time to Refinance Your Home Loan?

With rates at historic lows, you should consider refinancing, expert says.

May 25, 2010 — -- Mortgage interest rates are nearing a 50-year low.

Last month, existing home sales jumped 7.6 percent. The median home price is also up 4 percent over a year ago.

So, what does this mean for people who are looking to buy and those who already own a home?

Mellody Hobson, president of Ariel Investments and "Good Morning America" personal finance contributor, appeared on the show to talk about what all this means for you:

Q: What factors are behind the big jump in sales of existing homes?

A: Hobson said Americans took advantage of the federal home buyers' tax credit. In order to qualify, buyers had to sign contracts by April 30 -- and they'll have to close on the home by the end of June. First-time buyers were offered a credit of up to $8,000, while homeowners who were looking to upgrade qualified for up to $6,500 in tax credits under the program.

Q: Where do mortgage rates stand now?

A: Hobson said the current average rate for a 30-year, fixed loan is 4.87 percent. She said that's the lowest rate in 30 years. The 15-year rate is 4.19 percent, and rates for jumbos -- loans of more than $417,000 -- have also fallen, she said.

Q: Why are rates so low? Will they go lower?

A: The financial turmoil in Europe is providing an unexpected windfall for American home buyers, because international investors who are seeking a safe haven are putting money into U.S. treasury bonds, she said. Ten-year treasury bonds are tied to mortgage rates, and the increased demand has driven bond prices up and mortgage rates down, she added.

Hobson said the rates aren't expected to remain so low in the long term.

Q: With rates so low, is it a good time to refinance?

A: Yes. Hobson said nearly half of the people with 30-year, fixed loans have interest rates of 5.75 percent or more. Even with the cost of refinancing, homeowners can drop their interest rates to below 4.9 percent, so it makes sense to do it, she added.

But it will be hard, she said, acknowledging that the days of doing little paperwork for a mortgage are over. Qualification rules are as stringent as they've been in the past 10 years, she said.

Zillow.com says that one in four homeowners are underwater on their mortgage, which means they owe more on their homes than they are worth. Those owners may not be able to get loans at the new rates, she noted.

Another reason it may be hard to get a loan is the credit requirement. The average credit score is about 692, but many homeowners would need a score of at least 720 to be considered for the lowest-rate loan. Fannie Mae and Freddie Mac -- federally controlled mortgage lenders -- require a minimum score of 620, but borrowers will get the best rate if they have a score of at least 720, she said.

She added that FHA loans -- loans from the U.S. Federal Housing Administration -- may be a good choice for lower-income borrowers. The FHA requires that applicants have a minimum credit score of 620 and can borrow up to $729,750, she said.

Q: Should I go with a fixed or adjustable-rate mortgage for my refinance?

A: When in doubt, choose the fixed rate, Hobson said. Adjustable rate mortgages may not be the correct choice because there are several factors that could cause the rate to change, she said. Refinancing right now at a lower rate will save you money. A one percentage point drop in mortgage rates can reduce the monthly payment on a $400,000, 30-year fixed mortgage by $250, she said.

Because more private investors are coming to the market with better prices for securities containing lower-rate mortgages, borrowers may find it cheaper to refinance, because brokers will cut origination fees, she added.

Web-extra tips:

Deciding whether you should refinance is an important decision. Hobson said borrowers should determine their break-even point: Take your closing costs and divide it by the projected savings in monthly mortgage. The result will represent the number of months you will need to remain in your home in order for the refinancing to make sense.

For example, if your closing costs are $4,000 and you save $200 a month by refinancing, then you will need to stay in your house for at least 20 months. There are numerous calculators on the Internet -- including on websites such as bankrate.com-- to help you to do the calculation.

Shop around for the best mortgage rates and closing costs, as rates can vary from lender to lender. A great resource for quotes is LendingTree.com.

Check your credit report before you apply for a mortgage or try to refinance. This way you can correct any errors that could get you an unfavorable rate, costing you thousands in the long run. Bear in mind that numerous inquiries by mortgage brokers will only minimally affect your credit score, so this should not stop you from shopping around. Multiple inquiries made within a 45-day period are only considered as one inquiry, Hobson said.

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