PersonalFinance: The lure of low mortgage rates

WASHINGTON (Reuters) - Three straight weeks of record low mortgage interest rates has spurred another refi boom. That’s understandable: The idea of locking in 4.5 percent for 30 years is really tempting.

But not everyone who can refinance should, and not everyone who should, can.

“The truth of the matter is, the pool of potential refinancers is finite in this kind of market environment,” says Keith Gumbinger of HSH Associates, a mortgage research firm. “Market conditions haven’t gotten any easier, and rates are not really that much lower than they have been a number of times over the last six or seven months.”

Here are a few things to think about while you’re listening to the siren song of low, low mortgage rates.

-- It’s hard to predict if you will qualify. Credit standards continue to be tight, and in some markets home values may have fallen over the last six months. Furthermore, more consumers than ever before have subprime credit scores, rendering them unable to qualify for a mortgage, according to figures from credit scoring company FICO that were released earlier this week. But some people may find themselves better qualified to snag a loan than they were at the end of 2009.

If your personal income and the value of your home has stabilized since the last time you tried to refinance, and if you’ve been working hard at paying down your debt, you may qualify now even if you didn’t before. There’s no short cut to the answer: apply and see if it works.

-- It seems counterintuitive, but folks holding variable loans may just want to keep them. For years, the bedrock financial advice to anyone sitting on a variable-rate loan was: “Lock in a fixed rate now.”

Because long-term fixed rate loans have been priced so low, it seemed (and still seems) like a no-brainer. But here’s a new wrinkle: Many adjustable-rate mortgages getting ready to reset will find their rates going DOWN, not up, because of the low rates prevailing in the market. And most of those loans limit annual rate changes (after the initial reset) to 2 percentage points. That means, says Gumbinger, that anyone sitting on a 5 percent variable loan getting ready to reset could see their rate fall to 3 percent next year and only go up as high as 5 percent the year after. It would take two years or longer before the rate went as high as 7 percent (assuming market rates continued to rise.) So if you’re planning to move in 3 years or less, don’t bother refinancing that variable loan. If you’re going to stay longer than that, consider refinancing now even if your rate will initially be higher than your variable reset rate. You’ll save in the long term.

-- Older homeowners might consider refinancing even if they aren’t going to save money over the long term. Cash flow counts too. If you’re nearing retirement and have a lot of home equity, you might consider refinancing to get a low rate and low monthly payments. It could save you several hundred dollars a month, and you could use that cash to build your retirement savings, or pay other bills. That’s a tactic best taken by people who expect to sell their homes in a few years and pay off their mortgages. Otherwise, they’ll be pushing those mortgage payments well into retirement and that’s usually not a good idea.

-- Think about taking cash. Sure, it’s no longer considered cool to use your house like a bank account. But if you expect to be borrowing big bucks for graduate school (Stafford loan are rates 6.8 percent) or have any other costlier old loans to repay, you could do worse than taking all of the 4.5 percent 30-year cash you can get, assuming you can make the payments.

Nobody can predict interest rates, but it’s an excellent bet that sometime in the next 30 years rates will be much, much higher than they are now.

editing by Gunna Dickson