Time to buy or refinance a home?

By SmartMoney

Thank Ben Bernanke for breaking the 5% mortgage-rate barrier.

The Federal Reserve announced plans Wednesday to purchase up to $300 billion in Treasury securities over the next six months and an additional $750 billion of mortgage-backed securities through the end of the year. The 10-year Treasury, a benchmark for 30-year fixed mortgage rates, dropped 50 basis points on the news.

In turn, rates on fixed mortgages also plunged. Rates on conforming 30-year fixed mortgages, which averaged 5.29% Wednesday morning, according to Bankrate.com, dropped to 5% after the announcement. And by Thursday morning, Westfield, N.J., mortgage broker Neil Sullivan was on the phone with clients locking in rates as low as 4.5%.

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"(The Fed's actions are) going to keep mortgage rates low through the rest of the year and that is going to have positive implications for prospective homebuyers," says Greg McBride, senior financial analyst at Bankrate.com.

In fact, it's hard to find a better buyer's market right now. Not only are mortgages being granted at record-low rates, but there's a glut of unsold homes on the market selling at much lower prices than they would have a year ago.

Homeowners looking to refinance, however, face a bit of a dilemma: refinance now and miss out on the possibility that rates will drop even further, or decide to wait and miss out on today's record lows -- or perhaps be unable to refinance altogether.

For homeowners trying to figure out what to do, here are some factors to consider that should help you decide:

Home prices

Are home prices in your area still in free fall? If the answer is yes, holding out for lower rates is a dangerous proposition, warns McBride.

"If you wait too long, sure, rates might drop -- but then the value of your home may fall to the point where you might not be eligible to refinance," he says. "You could win the battle, but lose the war."

Equity in your home

Even with President Barack Obama's Homeowner Affordability and Stability Plan (.pdf file) in place, homeowners who owe more than 105% on their home's market value are not eligible for refinancing.

In addition, to qualify for the stimulus your mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac. Everyone else must shop around. And in those cases, lenders will require that you have at least 10% equity in your home, according to Keith Gumbinger, a vice president at HSH Associates.

Refinancing costs

Refinancing isn't cheap. You'll pay closing costs just like you do when you purchase a new property and refinancing a mortgage just to lower your rate from, say, 5.25% to 4.75%, may not make financial sense.

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"My rule of thumb is, if you can recoup the costs within 12 to 18 months, you're in good shape (to refinance)," says Frank Ruzicka, a mortgage banker with Cornerstone Mortgage in St. Louis.

"If you have a fairly good idea of the new loan's terms and closing costs, crunch the numbers and see for yourself."

Adjustable-rate mortgages

If you have a prime adjustable-rate mortgage that's about to reset soon, you may be surprised to find yourself with a rate of as low as 3.5%, McBride says. That's because these ARMs are typically pegged to the 12-month average of the one-year Treasury bill, which these days is well below 1%. (We're not talking about the subprime options ARMs here, whose rates are still prohibitively high for most homeowners.)

In this case, your decision to refinance hinges on how long you plan to stay in your home. If you aren't going anywhere in the next five or six years and the slightly higher payments with a 30-year fixed mortgage won't leave a dent in your budget, refinancing may still be prudent for the long term.

"When the economy recovers and inflation becomes an issue, the prospect is that rates will become substantially higher," McBride says. "You don't want to be sitting on an ARM when that day comes."

Lock-in periods

If you're offered a rate that's significantly lower than everyone else's, there's usually a catch.

"We all get our money from the same place," Sullivan says. "Every conventional, conforming loan today is being written to Fannie and Freddie standards."

Often, these lower rates come with shorter lock-in periods, sometimes as short as 21 days. Given the expected surge in applications, it may take well over four or five weeks to close on a loan.

"It's critical for people to understand how long it will take for the loan to be processed and make sure the rate lock is longer," Sullivan says.

This article was reported by Aleksandra Todorova for SmartMoney.