Now Is the Time to Refinance

If you haven't refinanced your mortgage recently, do it now.

Loan rates have slumped again in the past few days amid the world-wide stock market rout, but it's anyone's guess how long this opportunity will last.

Earlier this month I pointed out that rates on 30-year loans had fallen below 6%. But if that was a deal, what has happened since is a bargain. The rate on a typical 30-year fixed rate loan has now fallen to as little as 5.31%, according to Bankrate.com.

And you can find one or two rates down around 5% a year. That's for people borrowing $417,000 or less, with good credit, and a down payment of at least 20%.

The current averages are among the lowest seen in recent history, and they're a full percentage point or more below levels seen as recently as last fall.

Some borrowers are already taking advantage. Veteran mortgage broker Paul Sapienza, a partner of Boston-area Drew Mortgage Associates, says business has skyrocketed this week. "It's very busy -- it's night and day from a week ago," he says. Borrowers are grabbing 30-year fixed loans, he says. "I've written more [new mortgages] in the last day than I did in the previous three weeks."

(One big problem still facing the housing industry: This is only true for "conforming" loans below $417,000, which benefit from indirect subsidies from Freddie Mac and Fannie Mae. Rates on bigger "jumbo" loans, which have no such support, are still much higher.)

Mr. Sapienza's advice: Look closely at all the closing costs, as well as interest rates, before deciding to refinance. Unless you are saving half a percentage point on your loan, it may not be worth it. Also, if your home's estimated value has below the value of your mortgage, you likely won't be able to refinance.

He adds: Right now, you also need to take extra care to make sure your borrower can actually deliver a mortgage in time. Many lenders have slashed staff to the bone, he says. You don't want your application to get held up in a back-office suddenly swamped with too much work to handle.

If history is a guide, low rates on conforming loans may not last.

Why is this happening?

Long-term mortgage rates reflect the interest rates on long-term government bonds. Those have just collapsed, as one of the initial knock-on effects of the stock-market drubbing.

But the Fed's big cut in short-term rates this week may end up sending those long-term rates the other way. The housing bust and the debt crisis have forced the Fed to put short-term problems ahead of long-term inflation worries.

Federal Reserve Chairman Ben Bernanke may not like it, but he is going to end up doing whatever he has to in order to prevent a full-blown crisis.

The gold market already knows this. The price of gold has risen 6% since the start of the year to nearly $900 an ounce. The dollar has been bouncing around but it is notable that it continues to fall against the solid Swiss franc.

Yet, sticking out like a sore thumb, here are the yields on long-term Treasurys.

These will only turn out to be reasonable investments if we actually see deflation -- an era of falling prices. That is possible, but very unlikely. It is interesting that neither the gold market nor currency markets are factoring it in much at all.

source:http://online.wsj.com/article/SB120113218983711667.html?mod=googlenews_wsj