Last Chance to Refinance?

By Kirk Haverkamp,

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Mortgage rates have been on the rise. Is this your last, best chance to refinance and save money with a super low rate?

Perhaps. Although rates have been on a near-steady decline for nearly four years now, it's always been clear that rates wouldn't stay this low forever. Then again, each time the experts said that, mortgage rates responded by dropping even further.

Where are mortgage rates going?

So what's happening now?

Simply put, supply and demand. As the housing market and the overall economy continue to recover, there's more demand for credit throughout the economy. Not just mortgage borrowers, but investors, commercial interests and institutions are more interested in borrowing money, and are willing to pay higher rates to do so. That drives up interest rates across the board.

A growing economy often brings with it higher rates of inflation as well, so lenders charge more so the returns on their loans keep ahead of the rate of inflation.

So if the economy and housing market continue to gain steam through 2013, it's a good bet mortgage rates will rise as well. In fact, that's the general consensus from most observers, although it's worth noting they've been very wrong before.

On the other hand, if last quarter's 0.1 percent dip in the gross domestic product (GDP) turns out to be more than just a bump in the road created by the fiscal cliff, rates could stall out again.

How'd they get so low?

The reason mortgage rates are as low as they are is because the Federal Reserve has been working hard to get them there. Beginning in 2009, the Fed began a series of actions to drive down mortgage and other lending rates by buying up mortgage bonds and Treasury notes, essentially creating a flood of cheap credit. Each time they announced a new round of "qualitative easing," rates took another drop.

The Fed has announced that it intends to keep rates low through 2015, so mortgage rates aren't going to go flying through the roof anytime soon. However, there's a fair amount wiggle room in the definition of "low." Rates on 30-year mortgages could rise well into the 4 percent range and still be considered very low by historic standards.

Should you act now?

What it comes down to is, you can't count on rates remaining this low much longer. If you haven't refinanced already, chances are it's because you're waiting for something to change. Maybe you're hoping your home will rise in value. Maybe you're waiting for your credit score to improve, or are trying to pay down your loan enough so you'll have more equity and qualify for a better rate. Maybe you already refinanced a year or two ago and are debating whether to take one more shot before rates head back up.

If you're waiting for your credit or home equity to improve, you may not be able to refinance right now anyway, unless you can take advantage of a program like HARP (Home Affordable Refinance Program), which is designed for low-equity and underwater homeowners.

On the other hand, if you think you can get a significantly better interest rate by waiting for your credit or home equity to improve, it might make sense to keep waiting and watching - as noted above, the Fed plans to keep rates on a fairly short leash. But if rates rise by half a percentage point over the coming year, you could find your opportunity is gone.

Mortgage rates are unpredictable. No one really knows exactly where they're going to be six months down the road. All you do know is where rates are today and whether refinancing right now would be an improvement over your present mortgage. That's all anyone can do.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance Banking and Loans
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