Mortgage rates hit yet another new low this week — 4.42 percent on a 30-year loan. That's the lowest since Freddie Mac began keeping track in 1971.
So, if you've been thinking about refinancing, is now the time to strike?
The answer is yes, probably. Rates may go lower in the next few weeks; no one knows. When they hit bottom, we won't realize it.
But the consensus among economists is that our slow-poke economy will eventually pick up steam and interest rates will then go higher. If you lock in now, chances are you'll be slapping yourself on the back in a couple of years over the good rate you got.
Interest rates are notoriously hard to predict. For what it's worth, the Mortgage Bankers Association forecast last week that 30-year rates will be at 5 percent a year from now, and 5.8 percent in mid 2012.
If you're eligible to refinance, consider yourself lucky. In St. Louis, 18 percent of homes were worth less than the mortgage on them as of June, according to the real estate tracking firm Zillow.com. Many other homeowners no longer have the 20 percent equity needed to avoid expensive private mortgage insurance.
"You can be the perfect borrower, but you won't qualify to refinance because the neighbor next door went into foreclosure and the house sold for 50 cents on the dollar," says Doug Schukar, CEO of USA Mortgage, one of the largest mortgage banking operations in St. Louis.
Appraisers have become tougher since the government took them out from under the financial thumb of lenders and real estate agents looking to close a deal.
"In just the last 90 days, we've been hearing more and more about lower appraisals," said Schukar.
People with underwater mortgages can still refinance if they have good payment records and their loan is backed by Fannie Mae or Freddie Mac. The government-operated behemoths allow refinancing of loans up to 125 percent of the home's value. If your current loan doesn't require mortgage insurance, you won't need it for the refi. You can find out if Fannie or Freddie back your loan at www.fanniemae.com/loanlookup/ or www.FreddieMac.com/mymortgage.
Mortgage lenders have tightened their standards since they helped KO the economy in 2008. The mortgage rates you see advertised are for the most credit worthy customers.
If your credit score is under 720, you probably won't get the best rates, says John Frank, president of Paramount Mortgage in Creve Coeur. If it's under 640, you'll find it hard to get a mortgage. The median credit score in the U.S. is 711, according to the scoring company FICO.
Mortgage lenders are looking for people such as Kim Johnson. She walked into Paramount Mortgage last month with a high credit score and a down payment of more than 50 percent to put on a $190,000 home she was buying in Manchester.
From signing the contract to closing took just two weeks, and she landed a 4.5 percent mortgage. "I was thrilled. It obviously helped me buy a little more house," she said.
If you're considering refinancing, the calculations can get complicated, involving interest rates, the effect on taxes and of extending the length of the loan.
Most people take the shortcut and simply look at the lower monthly payment. Say you owe $150,000 on a loan you took out two years ago at 6.5 percent. If you refinanced at 4.5 percent today, you would save $213 per month on the monthly payment. If you paid $1,200 in closing costs, which is about average, you'd be ahead in about six months. You can find a good refi calculator at Bankrate.com
Many people are moving from 30-year to 15-year mortgages, says Schukar. A 15-year loan averaged 3.9 percent last week, with 0.6 points. (A point is one percent of the loan paid by the borrower at closing. You pay points to buy down the interest rate. The average 30-year mortgage rate of 4.42 percent includes 0.7 points.)
Moving that $150,000 mortgage to 15 years at a 4 percent rate would actually raise the monthly payment by $136. But the family would pay off the loan sooner and save mightily on interest.
It's best to shop around for a mortgage. Smaller banks often offer better deals than larger ones. Check a few banks, credit unions and mortgage companies, says Suzanne Gellman, consumer economics specialist at the University of Missouri. Ask about both rates and closing costs. You'll often find that lower rates mean higher costs and vice versa.
Be a little careful here. Lenders have been known to quote low rates just to get you into the office. By the time you arrive, oops!, rates have risen.
"You can negotiate," says Gellman. Lenders add "junk fees" to boost profits, so look closely at the charges. "Missouri doesn't require lawyers. So, if it says 'legal fees,' where was the attorney?" she asks.