Mortgage rates should remain near record lows in 2012

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If you're looking to buy a house or refinance in 2012, you should be able to take advantage of record low mortgage rates well into the new year.

Economists believe the average cost of a 30-year, fixed-rate home loan will remain at or near 4% throughout most of the year.

"Rates are likely going to stay very low, but I don't think we'll get much below 4%, assuming the recovery stays on track," said Aaron Smith, senior economist at Moody's Analytics.

If the economy were to pick up steam in the second half of the year, it could cause a slight rise in mortgage rates.

One major indicator pointing toward continued low interest rates is the Federal Reserve's plan to buy long-term government debt through the end of June. As the government-controlled bank said last fall when announcing the buying plan, it hoped to "put downward pressure on long-term interest rates."

Since mortgage rates follow long-term Treasury rates up and down, the Fed's action should help to hold the cost of home loans at or near the current record lows.

That sentiment is shared by Freddie Mac, one of the big government-owned entities that finances the majority of home loans.

Frank Nothaft, vice president and chief economist at Freddie Mac, says 2012 will be "another bumpy ride" for housing but rates should hold low through at least midyear.

But even if rates rise faster than expected, if they finish the year as high as 4.5%, they'll still be at historical lows.

The historical average of a 30-year home loan rate since 1970 is 8.8%, Smith says.

That puts the current rates at less than 50% of their historical average. Things just can't get much cheaper.

Exceptionally low rates and housing prices that are down as much as a third from their record highs five years ago have made buying a house a much cheaper proposition than during the real estate bubble.

Say you want to buy a $200,000 home that was going for $250,000 back in 2007.

You make a 20% down payment on a 30-year mortgage. Back before the financial crisis, you would have paid 6.5% on that loan, but you can now get it for 4%.

Factoring the price and interest rate, that home would have cost you $1,264 a month in principal and interest in 2007.

The same house would cost you just $764 today. That's a whopping 40% discount on the monthly payment.

Use our mortgage calculator to see what your payments would be for any fixed-rate loan.

While lending qualifications haven't gone back to the easy money days of 2005 (and that's a good thing), it's still a little easier to get a loan now than it was in 2009.

"Credit markets are still a little tight, but we're headed more into a direction of easing. Banks are starting to reopen the spigot, and as they do, the pool of people who can buy or refinance will also expand," Smith says.

If you have a FICO score of 720 and a down payment of 20% of your purchase price, along with documented income, you shouldn't have a problem getting a loan. Some lenders will now let you put down as little as 5%.

For an FHA loan, you'll need a minimum credit score of 620 and enough cash for a 3.5% down payment.

For all mortgages, you'll need to show two years of steady employment, and you should be prepared to document every aspect of your finances. This includes income, debt and assets.

It's also going to be another great year for refinancing. If you bought your home before 2008 and are paying 6% or more, you can save big bucks.

Follow this rule of thumb: It's worthwhile to refinance if you can lower your rate by a percentage point or more.

You're going to need at least 20% equity in your home (though some might allow 10%), a good credit score and the same documentation of income you'd need for a loan if you were buying.

If you have a 30-year loan for $200,000 at 6.5% and refinance at 4%, it could cut your monthly payments by more than $300 and save more than $100,000 in interest over the life of the loan, depending on how long you've been paying the original mortgage.

You could save even more in interest (although your monthly payment would increase) if you refinanced into a shorter-term mortgage.

Our refinance calculator will show you how much you can save by refinancing.

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