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Buy or Refinance Now? Four Key Points to Consider

By Elizabeth Harrell
December 2008

Mortgage rates recently dropped when the Federal government announced it would purchase $600 billion worth of bad debt from U.S. financial institutions. With this new bit of information, should you buy a home now or wait patiently?

The relationship among mortgage rates, the bond market and government bailouts can be murky water for the average consumer, but understanding the following four key points may help clarify the situation so you can decide the best move for your family's future.

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1. The Treasury Department Could Lower Rates for Home Purchases, But Not For Refinancing

The $600 billion Federal rescue plan provides a little more confidence for bond investors, although they haven't jumped back in with both feet, particularly when it comes to investing in long-term 30-year loans. While investors seem hesitant about pulling out completely, most are not making additional purchases.

This attitude could change at some point as the Treasury Department continues to push for lower mortgage rates. Once investors see loans back on the rise and the housing market stabilizing, they'll resume investing and rates will rise again, signaling a healthier economy.

According to a recent Wall Street Journal online article (U.S. Eyes Plan to Lift Home Sales), the Treasury Department wants an eventual 4.5% (or lower) rate in the near future to stimulate the home-buying market. Although the plan isn't clearly established yet, Treasury Secretary Henry Paulson points out that housing market recovery is essential for improving America's economy and surviving the current crisis.

Still, there are no guarantees of how low the mortgage rate will drop. At this time it appears that the 4.5% rate most likely won't apply to refinances, according to mortgage professionals and the Washington Post online article, Treasury Weighs Action on Mortgage Rates.

2. Financial Professionals Believe It's an Excellent Time to Purchase or Refinance a Home

Many mortgage professionals agree that it's an excellent time to make a purchase. Consumers who couldn't afford house payments may find themselves in a different position with the new rates. Families struggling to pay current higher-rate payments may find a lower-rate loan, refinance and end up with a more affordable mortgage. If you've been considering a home improvement or debt consolidation loan, rates certainly seem to warrant consideration.

3. Comparing Home Loans Makes the Most Sense

Comparing mortgage rates is an important step prior to purchasing any loan, no matter how low the mortgage rates go. While the rates are low and ideal for financing a home, other factors including credit scores, fees and points directly affect the overall cost of a loan. With all of the press about how many unqualified loans have been issued -- leading to foreclosures in some cases -- loan companies may be a slightly stricter about qualifying. With interest rates at record lows, refinancing a current loan or switching from an adjustable rate to a fixed loan rate makes sense.

4. There is a Potential Risk in Waiting

Real estate consultants note that holding out for a lower rate, even if the Federal government does end up with the desired 4.5%, could be risky. It's certainly possible to refinance or purchase now and then re-evaluate another refinance if rates dip considerably lower in the future. Home prices are not expected to stay at record lows, so investigating current mortgage loan opportunities can't hurt!

Elizabeth Harrell, a freelance writer from Charleston, S.C., enjoys writing about personal finance, education and family topics for Internet and print publications.

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