30-year mortgages fall below 4 percent. Time to refinance?

The average rate for a 30-year mortgages dipped below 4 percent for the first time in history this week.

Economic models suggest that interest rates might have been lower in, oh, about the time the Japanese attacked Pearl Harbor in 1941. So what’s next?

Rates could fall further.

“I think rates are going to go lower,” says Gary Shilling, an economist in Springfield, N.J. “I’m predicting we’ll go to 1.5 [percent] on the 10-year” Treasury bond, which often moves mortgage rates. The 10-year bond yield dropped below 2 percent in September, leading to multidecade lows in mortgage rates.

In the week ended Oct. 6, the average conventional 30-year fixed mortgage hit 3.94 percent (with an average 0.8 points to refinance), according to Freddie Mac, the mortgage giant based in Washington, D.C. Average rates for fixed 15-year loans fell to 3.26 percent (with an average 0.8 points), also a historic low.

So is it time for you to refinance? That depends on individual circumstances.

Many homeowners don’t qualify for a new loan because the value of their homes has fallen so much that they’re “underwater” – they owe more on the loan than the property is worth. Others don’t have enough equity left in their home to get a low rate. Still others no longer have full-time jobs – or their credit scores have dropped, making banks leery of lending to them.

Those who do qualify may be waiting for rates to go lower.

“In normal times, people would be leaping in to refinance,” says Stephen Thode, a real estate expert at Lehigh University in Bethlehem, Pa. “But by no means do people think that interest rates are going to go up.” Their patience could be rewarded. More debt jitters in Europe could send investors scrambling into less risky investments, such as US Treasury bonds. That would reduce interest rates. Ditto for a new recession in the United States.

Typically, the spread between the 10-year Treasury bond rate and 30-year fixed mortgage rate is 1.5 to 1.7 percentage points. But this summer that spread rose to more than two percentage points, says Mike Fratantoni, vice president of research at the Mortgage Bankers Association in Washington.

This suggests that even if nothing changes and interest rates stay where they are, mortgage rates could drift down to about 3.5 percent over time.

But why wait to finance?

"You can take a chance and maybe rates will fall a little further, but how much of a difference will that make on your monthly payments?" asks Polyana da Costa, a mortgage reporter for Bankrate.com, a financial-rate information website. "And what if while you're waiting for the lower rates, the value of your house drops or your employment situation changes? If that happens, no matter how low rates go, you might not be able to refinance. If you think you qualify for a refinance now, it's probably a good idea to go for it."

Baby boomers and other longtime homeowners should consider a 15-year fixed-rate mortgage, says Frank Nothaft, chief economist for mortgage giant Freddie Mac. “You can’t beat a 15-year. The amortization schedule guarantees you’ll have it paid off right about when you retire.”

To see if it’s right for you, figure out the cost of refinancing. (It can easily cost $2,000 or more because of title insurance and an array of local government and other fees.) Then figure out how long it will take to pay that back with the money you save every month with the lower rate. (Personal finance programs, like Quicken or Microsoft Money, have calculators that simplify the math.)

If the payback is a year or less, then it's generally a good idea to consider a new low-rate loan.

Or try this online calculator from three economists, which specifically aims to tell homeowners when mortgage rates have fallen so far that it's no longer worth waiting for rates to go down before refinancing.

But be aware: There is a risk to owning a home in the first place.

Mr. Shilling, for one, thinks home values still will fall another 20 percent. His recommendation: Sell your house and rent.

“There's no free lunch in this deal,” he says. “You didn't get em [low rates] because you've got a friendly banker. You got ’em because economic conditions are terrible…. Except for house appreciation, owning a house is not a good deal.”