Historically low interest rates are a powerful goad to action but do your homework first

The last time mortgage interest rates were as low as they are now, you could buy a gallon of gas for 19 cents and a loaf of bread for 16 cents.

So what has turned the home loan clock back to 1951?

The federal government’s attempt to fight a stubborn economy that seems stuck in first gear.  One of the benefits of the Federal Reserve continuing low interest strategy is cheap loans.

Borrowers can refinance their home purchase for an average 4.21 percent on a 30 year fixed rate home loan, says government controlled mortgage buyer Freddie Mac in its weekly survey of mortgage rates posted last week.

That means a homeowner with a $200,000 mortgage with an interest rate of 6.07 percent could save more than $230 a month on principal and interest payments by refinancing at current rates.

The potential savings have jolted many homeowners into action.

“People are starting to think, I don’t want to miss something that may be a once in a lifetime opportunity,” said Cess Chappell, a financial planner at Chappell, Mayfield and Associates in Atlanta.

Conventional mortgage applications for refinancing jumped 24 percent last week from the week before.  That’s the strongest pace since mid April 2009, according to Mortgage Bankers Associated figures.

The 30 year fixed rate loan has been under 5 percent for more than five months, Freddie Mac said.  The last time rates were that low was April 1951.

How’s a homeowner to decide whether to refinance?

For those with an adjustable rate mortgage now is a good time to lock in interest at a permanently low rate.

Also it makes sense for homeowners with good credit scores who plan on staying in the home for several more years.

Online calculators can help you estimate the time it will take to recover your financing cost, giving it will an idea about whether refinancing makes sense for you based on how long you plan on living in your home. 

As you think abut refinancing, here are five points to consider:

Shop Around

Compare the terms offered by different lenders.  Talk with your current lender and make it clear you’re shopping around.  In order to keep your business, your bank may cut or eliminate some refinancing costs including application fees and charges for a title search or inspection.

Avoid flashy ads or unfamiliar lenders that try to draw you in with introductory interest rates but may have hidden fees.  Ask friends and family members who have recently refinanced for recommendations or your Realtor.

Lock in a Rate

To make sure you get the current interest rate ask about a mortgage rate lock in and get it in writing.  This is a guarantee by the bank that you’ll get the current low rate while your loan is being processed.  Locked in rates typically are for specified periods for 30 to 60 days.

Locking in a rate is a little bit of a gamble because rates could go up or down during  the several weeks it takes to process your loan.  However, with current historically low rates it’s unlikely they’d drop much further, but they could edge up.

Before you sign any commitment make sure that you understand all the costs and details of the loan and that you’ve done your comparisons and know it’s the best deal.

Don’t cash out

It it’s not absolutely necessary, resist the temptation to use the refinancing to cash out some of the equity you’ve accumulated.  Your home is a long term investment and not an ATM, say Chappell, the Atlanta financial planner.

If you borrow only the amount in the refinancing that you currently owe on your home qualifyi8ng for a loan will be much simpler.

Do Your homework

Before meeting with a banker, make sure you can document your income and be sure your house is worth more than you need to borrow.  It’s a good idea to get a copy of your credit report in advance to avoid any surprises.

Shorter Terms?

One strategy to consider is comparing the payment of a 30 year mortgage with those of a 15 year.  Taking the shorter term loan will cost a more per month but will build equity  faster and cost you thousand of dollars less in interest.

An alternative to go ahead and refinance at 30 years but continue to pay the same mortgage payment you do now or at least pay more per month than the new low payment requires.  This pays off the mortgage faster again saving money in the long run.

by David Pitt,  Associate Press