Mortgage rates hit record low. Should you refinance?

The last time mortgage rates were this low, homes cost less than $25,000, people used single dollar bills to pay for a tankful of gas, and no one worried about OPEC or stagflation. Microprocessors hadn't been invented yet.

So now may be a great time for many homeowners to turn back the clock to the 1960s and refinance their mortgages. Rates on 30-year fixed mortgages dipped to an average 4.71 percent last week, according to a Freddie Mac survey released Thursday. That was the lowest level in the 38 years the mortgage-backing agency has tracked them.

Whether you're one of those homeowners who should refinance depends on a few factors, especially how much you owe on your home and how long you plan on living there. If you're considering the move, ask yourself these questions:

1. Do I qualify? If you've got substantial equity in your home and your credit is excellent, then there's usually no problem. But if you bought at the height of the housing bubble — 2005 to 2007 — the value of your home may have declined so much that you no longer have 20 percent equity in the property, which is usually the minimum to get the best interest rates. If you're not sure, get your house appraised ahead of time, suggests Steve Thode, director of the Goodman Center for Real Estate Studies at Lehigh University in Bethlehem, Pa. Sure, you'll pay a little extra (the lender will probably demand another appraisal), but it can keep worse things from happening. "If the property does not appraise [at a high enough level] you could be rejected on your loan, which isn't a nice thing on your credit record," says Mr. Thode.

2. What's the cost of refinancing? It's not just the rate that's important. It's also the cost of getting the loan. Find out if the bank charges an application fee and any points on the mortgage. Then add in all the unavoidable costs, like title insurance, recording fees, etc. These quickly add up to thousands of dollars. For people with only a few years to go on their current mortgage, the shift to a new one may not be worth it.

3. How long do I plan to live here? If it's a long time, you have time to recoup refinancing costs. If it's less than three years, refinancing might not be the right move.

4. What will I save? A personal-finance program like Quicken or an online mortgage calculator can tell you how much you'll save each month with the lower rate. Then calculate how many months it will take to break even. It it's more than three years, refinancing is probably not worth the bother, Thode says.

But done right the savings can be powerful.

My own experience is a somewhat useful example, since last week I locked in a 4.75 percent rate at a cost of $2,800. That lower rate should save me about $75 a month. If I stay in the house 10 years, that's $9,000.

Think of it as a return on an investment, says Jack Friedman, a real estate economist in Dallas, who used a financial calculator to come up with the result. To receive $75 in "interest" every month for 10 years on a $2,800 certificate of deposit, a bank would have to offer me a 30 percent interest rate.

When was the last time you got a 30 percent return on a virtually risk-free investment?

If I stay in the house five years, my internal rate of return (IRR) is still a great 20.5 percent, he calculates. But if I stay only three years, I lose 2.3 percent on my $2,800. (The IRR is a somewhat complicated calculation and probably best left to a financial calculator. I couldn't find an online calculator that handled monthly figures well.)

Rates can vary a lot by lender, so don't be shy about comparison shopping. A good place to start is Bankrate.com, which gives rates and costs of local lenders based on your personal data.

Before making any final moves, talk with your current lender, suggests Thode. "Lenders generally want to keep good customers," so they may offer a break on refinancing costs or some other perk. Another good place to check is your own bank, which can offer discounts on mortgage rates and other banking charges, he says. (My bank's discounts and other perks made the refinancing worth it for me.)

No one knows, of course, what will happen to interest rates in the future. But as the economy slowly begins to recover, the risk that mortgage rates will rise loom a lot larger than the possibility that rates will fall much further.
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