McGinn: A 4.5 Percent Mortgage for Christmas?

Like a lot of families, mine cut back on holiday spending this year. With the economy weakening and everyone anxious about their jobs, my wife and I agreed to forgo gifts for one another. And while we still spoiled our children, gifts for our extended family were more modest than last year.

While I like gift-wrapped packages as much as the next guy, there was only one present I wanted: the chance to refinance my mortgage at a ridiculously low rate.

The week before Christmas, the Federal Reserve dropped the federal funds rate to zero percent, a number usually associated with the cut-rate financing deals offered by near-bankrupt auto companies. While movements in Fed-controlled short-term interest rates don't always affect long-term rates (which include mortgage rates), in this case they have. The rate on 10-year Treasury bonds recently hit a historic low of 2.1 percent. That, in part, has led to a rush of calls to mortgage brokers by homeowners seeking to refinance, with rates on 30-year mortgages dipping toward 5 percent. Since I hate to miss out on a good deal, I shot my mortgage broker an e-mail just before Christmas and asked if he's got a present for me.

I'm not in any rush, mind you. I've read the statement issued by the Federal Reserve's Open Market Committee, which made clear it expects to hold short-term rates low for quite some time.

I've also been closely following the debate over whether the federal government should step in and subsidize mortgages for new homebuyers, which could send rates even lower. As ++The New York Times reported a couple of weeks ago, the Treasury Department, real-estate-industry lobbyists and even Ben Bernanke have been chewing over a plan to let new homebuyers finance their home purchases at a rate of 4.5 percent, with the government helping to subsidize those rates. Some proponents of this plan—among them Columbia professors Glenn Hubbard and Christopher Mayer, who wrote about it in The Wall Street Journal—argue for extending this rate to include even existing homeowners, who could refinance their existing mortgages at 4.5 percent. Rates this low, they contend, would help stabilize the falling housing market, which is what caused this whole economic mess in the first place.

For a lot of people, including me, such subterranean rates would mean some serious savings. I carry two mortgages on my house. My first mortgage is a 15-year loan at 5 percent—a rate that's so low, I figured I'd never have to refinance. The second loan, used to finance a big renovation a few years ago, is a 30-year note at 6.25 percent. Like most people, I wish my monthly payment weren't as high as it is, but compared with a lot of people, I don't have too much to complain about. Even as its value has fallen, my home is still worth more than I owe on it, and so long as I remain employed, my monthly mortgage payment is well within the range that lenders think I can afford, based on my income.

Still, America's interest-rate limbo could wind up putting big money in my pocket. To figure out how much money I'd save by refinancing, I plugged my mortgage balances into an online calculator to come up with the "blended" interest rate that combines my two loans; the numbers suggest this average rate is around 5.7 percent. Using a basic online mortgage calculator, I tried consolidating both balances to a 4.5 percent 30-year loan. The calculator says I'd save more than $1,000 a month. (I was surprised the savings were so significant; however, that results not just from the lower rate, but from extending the term by converting my existing 15-year first loan into a 30-year obligation.) Even if I roll both loans into a new 15-year mortgage, which some lenders are now offering for below 5 percent, I'd save a few hundred bucks a month and still pay off my second mortgage faster than I would otherwise.

What's my best bet? I'm waiting for my mortgage broker to get back to me, but for now my guess is I'm probably going to hold off and continue watching rates closely. If the chance to refinance at 4.5 percent really does materialize, I'll probably grab it and then figure out if it makes sense for me to make higher payments in an attempt to pay down the loan in less time.

As a consumer, any of these options sound swell to me. As for the public-policy implications, however, I'm not yet totally convinced this makes sense. I'm all for the government doing what it can to help troubled borrowers stay in their homes. And as I've argued before, I think the government should be doing more to push through loan modifications for homeowners who are close to losing their homes. As for the rest of us, there's no question that putting extra cash in homeowners' pockets would be good for the economy right now. Experts like Hubbard and Mayer have argued that with the government able to borrow funds at 2.1 percent, they might still earn a profit on 4.5 percent mortgages.

Still, skeptics envision such a deal costing the government many billions of dollars over time. Some worry about the government stepping in with a scheme to prop up home prices and argue that it's better to just let prices stabilize at wherever free-market equilibrium happens to lie. As for me, I'm a bit leery of any stimulus plan whose effects will linger for decades to come. So, philosophically, this jury of one is still out on this debate. But if rates continue heading down, you can bet I'll be happily taking advantage of them. For me, decades of lower mortgage payments beats anything Santa can leave under the tree.