With mortgage rates having fallen a full percentage point in under a year, the natural question is: how low can they go? Or, to phrase the question from the standpoint of a mortgage holder: is this a good time to refinance?

 A look at history suggests that refinance rates are currently well below average, and for many homeowners this might indeed be an excellent time to refinance a mortgage.

 Current Conditions

As recently as last June, thirty-year mortgage rates peaked at 6.74%; by mid-January of 2008, they had fallen to 5.69%.

 Interest rates tend to fall when the economy is weak, and certainly the outlook for the economy has deteriorated since last summer. Growing concerns about the economy have pushed yields in the bond market steadily higher, which tends to move mortgage rates lower. The Federal Reserve has followed suit, and has already acted 6 times in the past 6 months (including a drastic .75% cut on 1/22/08 which was the largest cut in over 20 years) to lower interest rates.

 A Historical Perspective

So mortgage rates have fallen by over a point since the start of last summer. Does that make 5.69% a low mortgage rate? A historical perspective would suggest that it is a very low rate indeed.

 In 36 complete years of mortgage data (i.e., 1972-2007), mortgage rates have ventured below 5.69% for a few months on rare occasions, but never have they averaged 5.69% or lower for a full calendar year.

 This creates an interesting paradox. For all the bad news about the mortgage market these days, the truth is that there has rarely been a better time to get or refinance a mortgage--especially for people with respectable credit histories.

 A Precious Window to Refinance

As a matter of fact, this can be seen as a precious window in which to refinance a mortgage because the opportunity may not last. Anyone who got a mortgage in the last two years is likely to find a lower refinance rate today. Refinance rates should also be lower today than for most mortgages originated over the last thirty years, and in many cases are lower by enough to more than recoup closing costs on a refinanced mortgage.

 With signs the economy is weakening, there is talk that rates may go lower still. However, mortgage holders should not count on this. If there is one thing history teaches, it's that interest rates are volatile. Over time, thirty-year mortgage rates have been as high as 17.60% and as low as 5.23%. That suggests that while refinance rates could get a little better they could also get a whole lot worse.   

 The Conclusion about Refinance Rates

Looking at the past is more certain than trying to speculate about the future. History suggests that mortgage rates are at the low end of the range, but the decision to refinance a mortgage really depends on the mortgage holder's individual history. A comparison between the rate on the existing mortgage and current refinance rates can determine if the savings justifies the cost of refinancing. If current refinance rates are significantly lower, there may be no need to guess about the future. All the mortgage holder needs to know that the present holds an opportunity to save money.

 Sources:

United States Federal Reserve

Freddie Mac