What Are You Waiting For?

Mortgage rates have been hovering at historical lows for months—but some homeowners are waiting for even better deals before they take the plunge and refinance.

Experts say that could be a mistake.

The average rate for a 30-year fixed-rate mortgage fell to a record low of 3.87% for the week ended Feb. 2, according to mortgage-finance giant Freddie Mac. Rates on fixed-rate 15-year loans dropped to 3.14%.

Many homeowners who are able to refinance are holding out because they believe rates still have more to fall.

Jason Riggs, a consultant to a San Francisco nonprofit, is grappling with whether he should refinance the $560,000 mortgage on his duplex. The 38-year-old wants to get a better rate than his current 5%, but says, “I’m really wary of spending the time and money to do this and then have rates go lower.”

Adding to the optimism over the prospects for lower rates: President Barack Obama’s recent appeal to Congress for new legislation to allow homeowners who are current on their mortgages the chance to refinance at bargain-basement rates.

Already Near Bottom?

Yet in the short term, the administration’s proposal isn’t likely to lower rates, experts say. In a report this month, Barclays Capital called it more “bark than bite.”

Some economists predict the Federal Reserve will embark on a third round of bond-buying known as “quantitative easing” to target mortgage rates directly. In this scenario, the Fed would buy large quantities of mortgage bonds to drive down rates.

But many economists don’t think such a program would move the needle significantly. “It’s going to take heroic measures in the short term to do much more with rates,” says Brad Hunter, chief economist at Houston-based Metrostudy, a housing-market research firm.

If anything, with the economy improving, albeit slowly, the odds are better that rates will tick a bit higher in coming months, economists say.

The upshot: “This is an excellent time to refinance,” says Greg McBride, a senior financial analyst at Bankrate.com, a consumer information site.

Mortgage rates vary by region, but they are down around the country for borrowers with top-notch credit. Homeowners in Chicago can get a 3.625% rate on a 15-year fixed-rate mortgage from Bank of AmericaCitigroup, meanwhile, is offering a 3.875% rate on 30-year fixed mortgages and 3.250% on a 15-year fixed-rate loans. EverBank Financial of Jacksonville, Fla., is offering San Diego residents a 3.88% rate for a 30-year fixed mortgage.

To be sure, brewing fears about Europe’s instability could damp rates a bit, Metrostudy’s Mr. Hunter says. But it would take an economic catastrophe there to send rates plunging from these levels, economists say.

Homeowners who are waiting to see whether a new quantitative-easing program will lower rates further are going to be disappointed, say housing economists. That is because the Fed’s future bond-buying spree already is being reflected in the markets. Mortgage-backed securities are trading near record-low yields, which move in the opposite direction of prices.

Even so, mortgage rates haven’t moved in kind. Historically, average rates on 30-year-fixed mortgages tend to be around 1.68% higher than the yield on the 10-year Treasury note. This month, the spread is 2.0%, according to John Burns, president of research firm John Burns Real Estate Consulting.

That spread isn’t likely to get squeezed much further, Mr. Burns says. “Rates don’t have much further to fall,” he says.

When considering a refinance, of course, it is important to factor in closing costs, marginal tax rates and the number of years left on your mortgage. Many experts say it doesn’t make much financial sense to refinance unless you can reduce your rate by at least one point.

Your “break-even” threshold, which is when the savings surpass your upfront costs, shouldn’t exceed two years, experts say, unless you are sure you will remain in the house longer than that.

To help defray the upfront costs, homeowners can try to persuade lenders to cover the bill for their fees. Regional lenders are more likely to agree to cover the costs on loans backed by Fannie Mae and Freddie Mac.

“It’s in no way a freebie, but for some homeowners, it works,” Mr. McBride says.

Shorter-Term Loans

Another way to save is to refinance into a shorter term to cut the total interest payments. For instance, you could ditch a 30-year-fixed mortgage for a 15-year loan.

Say you have 25 years left on a $400,000 fixed-rate loan at 5%. By jumping into a 15-year fixed-rate mortgage at 3.375%, your monthly payment would jump by about $687, but you would save more than $200,000 in total interest payments.

Ellen Richard, a 34-year-old stay-at-home mom in Arlington, Va., traded in her 30-year fixed-rate mortgage at 5.5% for a 3.375% 15-year loan in December. Even though her monthly payments went up by $978.25, she will save $160,671 in interest over the life of her loan.

Says Ms. Richard: “It was such an excellent decision.”

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