Mortgage rates: How low can they go?

As mortgage rates hit a new record low this week, two questions come to mind:

• How low will rates go?
• And when will they head back up again?

The average rate for a 30-year fixed-rate loan fell for the third straight week, to 4.57%, down from 4.58% last week, according to Freddie Mac's weekly Primary Mortgage Market Survey. The average rate for a 15-year loan was 4.07%, up from 4.04% last week.

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The 30-year rate is the lowest since Freddie Mac started keeping records in 1971 and the lowest recorded by the Bureau of Economic Statistics since February 1955, when home-loan terms were shorter than 30 years.

The number of refinancing applications rose 9.2% last week, the Mortgage Bankers Association said, as more people who refinanced last year, when rates were about 5.5%, see benefits to refinancing again. The number of applications for home purchases, however, continued to decline.

Why are rates so low? It's the economy, stupid.

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As Amy Hoak of MarketWatch explains, mortgage rates are low because of fears about the economy, both in the United States and abroad. She interviewed Greg McBride of BankRate.com, who said:

When investors get nervous, they flock to safe-haven investments such as government debt. Mortgage rates are priced relative to yields on U.S. government debt. The decline on government bond yields has directly benefited the mortgage shopper.

And when will rates start to rise? I left my crystal ball in my other office, but the short answer, obviously, is when the economy improves.

David Dessner, director of sales for New York's GuardHill Financial mortgage company, told Hoak:

It's all about confidence. When you have issues with the euro, sluggish labor, possible deflation and talk of a double-dip recession, there is a flight to quality in (U.S.) Treasurys.

So keep an eye on when investors start moving their money from U.S. Treasury bonds to other venues. That's when rates will start to inch up.

Remember that the published weekly number is an average gathered nationwide, so the actual rate customers are offered can vary. In fact, mortgage rates offered by a given lender on a given product can change daily, or even several times a day.

The irony of the record-low mortgage rates, of course, is that so few people can refinance or afford to buy because of the same economic conditions that are keeping rates low.

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Ted C. Jones, a title company economist in Houston who was interviewed by Holden Lewis of Bankrate.com, has what he calls "a great way to get money in the pockets for people to recover from this economy": Allow anyone who is up to date on mortgage payments to refinance at the current market rate, even if they owe way more than their home is worth.

If you're one of the lucky few Americans who have at least 20% equity in your home, a solid income and good credit, you may want to see if refinancing could save you money. Refinancing a $250,000 mortgage from 5.5% to 4.5% would save about $150 a month. (You can use the MSN Money mortgage calculator to check your numbers.) But whether refinancing provides a true savings depends on whether you'll live in the house long enough to recoup your closing costs, which vary widely across the country.

Is this a good time to buy a house or should you wait for rates to go lower? Or rush now for fear rates will spike soon? This assumes, of course, you have a down payment, a secure job and good credit -- things many Americans lack these days.

McBride and other experts interviewed by Hoak expect rates to rise by the end of the year, but McBride points out that 5.5% is still a low rate, by historical standards (mortgage rates averaged 12.8% when I bought my first house in 1983). On a $100,000 loan, the difference between a 4.5% rate and a 5.5% rate is $61 a month.

The biggest question to ask is whether this is the right time for YOU to buy a house. As McBride told Hoak:

Low mortgage rates boost affordability, so while that certainly helps, it isn't the reason to buy a home any more than you decide to get married because there is a sale at the bridal shop.

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