mortgage

Can I refinance below 5 percent?

EDITOR'S NOTE: Refinancing activity is soaring, so Bankrate asked personal finance columnist Dr. Don Taylor to answer some of our readers' most pressing questions about getting a new mortgage.

Don Taylorq_v2.gifDear Dr. Don,
Based on the state of the economy, is there any chance we could see 30-year fixed-rate mortgages at or below 5 percent?
-- Curtis Curtail

a_v2.gifDear Curtis,
Sure, there's a chance. In fact, there's a good chance if some of the chatter about the Treasury seeking to bring mortgage rates down to 4.5 percent as a way to jump-start the housing market is true.

Thirty-year fixed-rate mortgages are priced off the 10-year U.S. Treasury note. The 10-year note is trading at the lowest levels since the Federal Reserve Board started recording the levels back in the 1950s.

At this writing (Dec. 17), Bankrate's national average for a 30-year fixed-rate mortgage is 5.42 percent and the 10-year note is at 2.2 percent. The 10-year has recently been as low as 2.48 percent. That's a spread of 3.22 percent. Historically, spreads are typically between 1 percent and 2 percent.

The current widening of the spread can be explained in part by the "flight to quality" in Treasury securities. In uncertain economic times, investors flock to the safety of owning U.S. Treasury securities.

The yields on other investments, like mortgages, don't follow the Treasuries lower, thereby widening the spread to Treasuries. A little year-end pressure for portfolio managers to own Treasuries also keeps the Treasury rates low.

However, it's important to remember that while it may be a loan to you, it's an investment to someone on the other side. Without government support or intervention, trying to find an investor willing to loan money for 30 years at less than 5 percent is a pretty tough hurdle.

Does a refinance make sense for you? Try Bankrate's refinance calculator to find out how much you might save.

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