Money Coach: Beware Of Low Mortgage Rates

Mortgage rates are dropping in some markets. But Money Coach Alvin Hall cautions homeowners that it still may not be the right time to refinance.

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TONY COX, Host:

And now we turn to our weekly conversation on personal finance. Record low mortgage interest rates have created another refinancing boom. Right now homeowners can lock in interest rates as low as 4.25 percent for a standard 30-year fixed mortgage.

According to the Mortgage Banker's Association, home loan refinancing activity jumped more than 26 percent as of August 20th, reaching its highest level in 15 months. But finance experts are saying not everyone who can refinance should refinance, and not everyone who should can.

Here to explain some of the issues for us is TELL ME MORE's money coach, Alvin Hall. He's joins us from NPR's New York bureau.

Welcome, Alvin.

ALVIN HALL: Hello, Tony.

COX: Alvin, who should look to take advantage of these rates?

HALL: Anyone who has a high interest mortgage, anything above five and a half percent, should look at taking advantage of these new low rates. It would reduce their monthly payments substantially. And that is the key thing, locking in this low rate for as long a period as you can.

COX: We mentioned that not everyone who should refinance can refinance. So which homeowners want to refinance but cannot, and why not?

HALL: There's several things that are going on these days. First of all, when people apply for a refinancing of their home, they need to expect that in the current economic climate there's going to be a 100 percent audit of their application. That means if there's anything wrong, if there's weakness in their credit scores, or that they're not putting up enough money, they don't have enough money to do it, then the bank is likely to say no and turn them down. And they'll discover that they'll be turned down again and again as they go from one place to another.

So the whole landscape has changed, partly due to reforms brought about by the economic crisis that we're in, and also problems brought about by the fact that a lot of people are unemployed or have seen their salaries become either frozen or stagnant over the past couple of years.

COX: Alvin, many homeowners with adjustable rate mortgages are looking for something more stable. Is refinancing a good option for them or - and this seems contrary to the wisdom of the day - just stay with the adjustable rate that you already have?

HALL: Oh no. If you have an adjustable rate mortgage and you can lock in a fixed rate at this level, lock it in now. Remember, adjustable rates have those teaser rates up front. But then, as interest rates go up, they will move up. No one can tell what's going to happen in the future, and clearly there's the expectation that inflation will enter the economy at some point and interest rates will go up. If you can lock in a low rate now, it's the time to do it.

COX: With the hope for recovery still coming along very, very slowly, is buying a home still the best purchased/investment that you can make today?

HALL: That's up for grabs. People are now saying that buying a home is no longer the type of investment it used to be - that people will no longer be able to see house prices rise at that spectacular level that they've always been. But you know, conventional wisdom for years was that buying a house was not an investment. Buying a house was a form of enforced savings. What you would be doing, you'd be putting your money into the house and hopefully the value would be going up at a nice rate, so that when you retired and you downsized, you'd be able to pull some money out of it to fund your retirement.

People are saying that even as a savings vehicle, people will no longer be able to expect the type of returns they have in the past. So this makes a strong argument, I believe, for diversification, that people should still own property but not view it as a fail-safe investment, that because they only have so much land, they can't build so many houses, therefore there'll always be demand. That logic is thrown out of the window these days. So diversify. Have some money in property, some money in stocks and bonds, some money in savings in the form of cash, diversify your holdings.

COX: So nothing is as it was. And talking again about refinancing, Alvin, what do you think homeowners who are stuck with low home values and maybe shaky credit as well, what can they do, or are they stuck?

HALL: They are in the most difficult position. Today, banks are looking at loan-to-value ratios of 75, 80 percent. That means you have to have 20 percent down. Some are even being more conservative; they're looking at 70 and 65 percent loan-to-value ratios. If you have bad credit, the property has gone down, you are going to have to appeal to the bank or try to get involved in one of those programs that the Obama administration has put out. But those are not likely to be very successful either, according to news reports.

COX: Final thing is this - with interest rates being low, there is not necessarily, is there, Alvin, a connection between that and the housing prices.

(SOUNDBITE OF LAUGHTER)

HALL: No. Interest rates being low often can have the effect of making house prices go up by creating demand. But because of the recent drop in house prices, a lot of them are still low and people expect them to be lower. So you have all of these people who are out there basically scavenging, trying to buy property at the lowest point and bidding it down, down, down because they want to lock in the smallest amount of mortgage at the lowest interest rate they can. Right now there seems to be no real connection between interest rates and housing prices.

COX: Really quickly, our time is running short, 15 years verses 30-year fixed, which is the best?

HALL: Well, I think for most people a 15-year fix is what they should look at. However, if you can't afford the payments on a 15-year fix and you want the comfort of knowing you can afford those payments over the longest period of time, go for the 30. It's all about comfort level and your certainty that you can make those mortgage payments through good times and bad times like these.

COX: Alvin Hall is an expert in personal finance. He joined us from our New York bureau.

Alvin, thank you very much.

HALL: You're most welcome.

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