How Low Will Mortgage Interest Rates Go?
Should You Hold Out for the 4 Percent Fixed-Rate Loan?
Feb 2, 2009
The interest rate on the average 30-year fixed-rate loan -- still the most common type of mortgage loan for U.S. home buyers -- stood at just 5.34 percent the first week of February, according to Bankrate.com. That's a nice rate. But some politicians and economists are pushing for a 4 percent fixed-rate loan for creditworthy borrowers.
That's a significant drop from even the historic low rates borrowers can enjoy today. But how likely is it that the 4 percent loan will actually become a reality?
Not surprisingly, no one really knows.
Pushing for the 4 Percent Fixed-Rate Loan
In a Feb. 2 story, Time Magazine's Barbara Kiviat wrote about the push that Senate Minority Leader Mitch McConnell made that day for a 4 percent fixed-rate mortgage loan backed by the government.
McConnell's argument is that such a loan for credit-worthy borrowers would create a growing demand for homes among the public. The 4 percent loan would also be available to current homeowners hoping to refinance their existing mortgage loans, and would, it is hoped, spur even more lending activity.
It's little wonder that so many homeowners are tempted to surf the Internet on an hourly basis looking to see just how far mortgage interest rates have dipped. That 4 percent interest rate is awfully tempting. Problem is, this bad habit can lead to inertia. Homeowners who can already qualify for perfectly low mortgage interest rates are waiting for the rates to go down even lower. There's a real danger that homeowners might wait too long and see rates rise instead.
Refinancing Not Always Worth It
A 4 percent fixed-rate mortgage sounds great. But borrowers should remember that it's rarely free to refinance a mortgage loan. The costs of refinancing may be high enough to make even the savings of a mortgage loan with an interest rate under 5 percent not worth the hassle. Borrowers can expect to pay from $2,500 to $5,000 in closing costs.
Borrowers should also remember that a lower interest rate may not always bring as much savings as they expect. A homeowner with a $200,000 30-year fixed-rate mortgage loan with a 6.5 percent interest rate would have a monthly mortgage payment of $1,264.14. If that same homeowner dropped the interest rate to 5.5 percent, the monthly payment would drop to $1,135.58. That's a monthly savings of just $128.56. Borrowers will have to decide if such savings -- even to get to a mortgage loan in the 4 percent range -- are worth the work of digging up paycheck stubs and tax information. They'd also have to decide if a refinance makes sense when closing costs are factored in.
Refinancing a mortgage loan is never an exact science. Homeowners who act today may find rates rising tomorrow. They may also wake up to find that rates have fallen even lower. The bottom line: If a refinance makes sense, homeowners should act, even if rates may fall even lower in the future.
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