Mortgage Rates Hit 37-Yr Low: How to Capitalize

Updated on December 18, 2008.

Forget caroling and ice skating. ‘Tis the season to review your mortgage or rethink your home-buying plans. 

The national average for 30-year fixed mortgage rates fell to 5.19% this week, according to Freddie Mac’s Primary Mortgage Market survey. The 37-year-low was spurred by the Federal Reserve’s Tuesday cut of the federal funds rate to 0%.

Recent reports suggest they could fall even lower in upcoming weeks. According to a Wall Street Journal report in early December, Treasury Secretary Henry Paulson is considering a plan that would have lending giants Fannie Mae (FNM) and Freddie Mac (FRE) encouraging banks to issue 30-year fixed mortgages at rates as low as 4.5%. No official announcement has been made. The Treasury and Freddie Mac did not return calls for comment. And a spokeswoman for Fannie Mae declined to comment.

Should the plan materialize, rates would be among the lowest seen in 50 years, says Keith Gumbinger, vice president of HSH Associates, which tracks rates on mortgages and consumer loans. But it’s far too early to count on such a move. “It’s all rumor at this point,” he says. “They’re ‘discussing the potential.’ There’s no plan, no details.”

Even without the rumored plan in place, mortgage rates still remain well below those of the past year. Rates began to drop in late November after the Federal Reserve announced it would purchase $600 billion in mortgage-related debt held by Freddie, Fannie, Ginnie Mae and the Federal Home Loan Banks. Rates have bounced around since, but have yet to creep above 6%. On Thursday, the average 30-year, fixed-rate mortgage was 5.28%, down from 5.64% last week and 6.33% in mid-November, reports mortgage tracker Bankrate.com.

Consumers have been quick to take advantage. Mortgage applications jumped 112% during the week of Thanksgiving, while refinancing requests were up an astonishing 203%, according to the Mortgage Bankers Association, an industry group.

While the latest news has some consumers wondering, “How low can they go?” they shouldn’t stay in limbo too long. Here's what potential borrowers should consider:

Analysts agree: Current rates are very attractive, and they aren't going to rise anytime soon thanks to government efforts like last week’s bailout. “I don’t think the window of opportunity is going to slam shut on anyone,” says Gumbinger. That said, rates fluctuate daily based on any number of market factors. Whether you’re considering buying or refinancing, pull together your financial paperwork such as federal tax returns, investment records and proof of income so that you can jump on good rates immediately.

The almighty credit score is king these days and, given some of the early details leaked about the Treasury's plan, it will continue to be. Most likely the more favorable mortgage rates will be reserved solely for those with the very best credit scores -- at least a 760 on the 300- to 850-point scale, says Christian de Ritis, director of credit analytics for Moody’s Economy.com, an economic forecaster. That’s all the more reason to build up your credit and avoid mistakes that could trash your score, like late payments and big balances. Help for those with less-than-stellar scores has yet to materialize, although Federal Reserve Chairman Ben Bernanke has urged the government to take steps to stem foreclosures by buying delinquent mortgages and offering bigger incentives for banks to refinance loans.

Early indications are that the Treasury’s low-rate plan would only apply to new mortgages, says Gumbinger. So if you’re looking to refinance, there’s no sense in hesitating. Bear in mind, however, that lending standards are still tight. You’ll need a great credit score and at least 10% equity in your home to qualify in most markets.

Don’t wait to buy a home based on a government plan that may not materialize, says de Ritis. Even if the plan does go through, those low 4.5% mortgages will only be extended to borrowers who fit the plan criteria, and won't be offered to borrowers across the board. If you were already thinking about buying, there’s no reason to put off your search.