Mortgage rates back near record lows

The Fed has raised short-term rates eight times, but a 30-year mortgage is cheaper today than it was last year. Here's why.

Mortgage rates are near their lows of the last five years, surprising everyone who claims to be an expert on the subject.

As of Friday morning, you could get a 30-year fixed-rate mortgage at 5.1%, according to Bankrate.com, not far off the low of 4.9% reached in March 2003 and well off its peak earlier this year of 5.7%. An adjustable rate mortgage could be had with a starter rate of 4.47%.

Low mortgage rates have fueled the housing boom of the last five years and a huge wave of refinancing. While many housing experts expect interest in refinancing to jump again, the fact is that so many people refinanced in 2003 and 2004 that it may not make sense to refinance.

Even now, though, there are many reasons to refinance: to get rid of private mortgage insurance, for example, or to leap to a fixed-rate loan.

Anyone who has an ARM that will adjust within 12 to 18 months and plans to remain in the house substantially longer than that should consider refinancing into a 15- or 30-year fixed, said Bob Walters, chief economist for Quicken Loans. Quicken and other lenders reported a surge in loan inquiries and rate lock requests.

"Right now, you can get 5.5% money locked down for a long time," he said. "You get opportunities; you've got to take them."

Why rates remain so low

The mortgage-rate picture has surprised many because the Federal Reserve has moved short-term interest rates higher eight times in the last year, from a low of 1% to 3% on May 3. The reasons longer-term rates haven't moved higher are more complicated. Global financial markets, not any government body, determine long-term interest rates through their bond trading each day. What's affecting them?

The economy may not be as strong as expected. (U.S. payrolls are now just 0.65% higher than their levels in December 2000.)

The dollar has actually jumped strongly this year and especially in the last week against the euro and the Japanese yen. Recent French and Dutch rejections of the European Union constitution caused many holders of euros to look for a better place to park their money. That pushed them into the dollar, which jumped 2% this week against the euro.

There's a glut of money sloshing around the global financial system looking for good opportunities and, absent those, safety. That's brought a lot of money onshore.

Thinking of pulling the trigger?

Here's what home buyers and homeowners should do to take advantage of the current environment.

Don't dally. As quickly as mortgage rates can come down, they can go up. Besides, stalling your lender while you wait for rates to fall is usually counterproductive. Not only might rates rise instead, but your lender may decide your indecision is a sign that you’re not really serious about refinancing -- which could drop your application back to the bottom of the pile.

Have your paperwork ready. Lenders will want to see your W-2 forms, bank and brokerage statements, tax returns, an insurance statement. If you're self-employed, make two or three years of tax returns available.

Follow up and follow through. Fax, overnight or hand-carry to the lender any paperwork that’s requested. Don’t wait for snail mail, and, by all means, don’t put off responding to requests for more information. Even short delays will send the wrong message.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.