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The New Economy

30-year mortgages fall below 4 percent. Time to refinance?

Although 30-year mortgages are at historic lows, some economists say rates on 30-year mortgages could fall further. So should you wait before refinancing?

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Typically, the spread between the 10-year Treasury bond rate and 30-year fixed mortgage rate is 1.5 to 1.7 percentage points. But this summer that spread rose to more than two percentage points, says Mike Fratantoni, vice president of research at the Mortgage Bankers Association in Washington.

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This suggests that even if nothing changes and interest rates stay where they are, mortgage rates could drift down to about 3.5 percent over time.

But why wait to finance?

"You can take a chance and maybe rates will fall a little further, but how much of a difference will that make on your monthly payments?" asks Polyana da Costa, a mortgage reporter for Bankrate.com, a financial-rate information website. "And what if while you're waiting for the lower rates, the value of your house drops or your employment situation changes? If that happens, no matter how low rates go, you might not be able to refinance. If you think you qualify for a refinance now, it's probably a good idea to go for it."

Baby boomers and other longtime homeowners should consider a 15-year fixed-rate mortgage, says Frank Nothaft, chief economist for mortgage giant Freddie Mac. “You can’t beat a 15-year. The amortization schedule guarantees you’ll have it paid off right about when you retire.”

To see if it’s right for you, figure out the cost of refinancing. (It can easily cost $2,000 or more because of title insurance and an array of local government and other fees.) Then figure out how long it will take to pay that back with the money you save every month with the lower rate. (Personal finance programs, like Quicken or Microsoft Money, have calculators that simplify the math.)

If the payback is a year or less, then it's generally a good idea to consider a new low-rate loan.

Or try this online calculator from three economists, which specifically aims to tell homeowners when mortgage rates have fallen so far that it's no longer worth waiting for rates to go down before refinancing.

But be aware: There is a risk to owning a home in the first place.

Mr. Shilling, for one, thinks home values still will fall another 20 percent. His recommendation: Sell your house and rent.

“There's no free lunch in this deal,” he says. “You didn't get em [low rates] because you've got a friendly banker. You got ’em because economic conditions are terrible…. Except for house appreciation, owning a house is not a good deal.”

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