With Rates This Low...

The Treasury Department is considering a plan to push down 30-year fixed-rate rates for home purchases to as low as 4.5%, in the hopes that it will stimulate sales, stop the freefall of prices, and allow homeowners to afford bigger loans.
But the proposed plan only helps those who buy homes, not those who want to refinance. Furthermore, you must have a steady job and good credit to qualify -- and you must not owe more on the house than it's worth.
Assuming the plan comes to fruition and you're in the market for a new home, should you take the bait?
Let's look at the pros and cons:
Pros: Unless a seller or builder bought down your rate, it's likely that you've never had the chance to buy a home with a 4.5% fixed-rate mortgage (see 30 Year FRM 1971-2008 graph at (mortgage-x.com). It's so tempting a rate that it may entice fence-sitters who have been waiting for home prices to hit bottom to jump anyway, since it (and other stimulus measures like it) are likely to evaporate once the economy starts to improve.
If the government succeeds in cutting rates to these levels, it will boost buying power considerably. If you bought a resale home at the current median price of $183,300 and took out a loan for 80% of the purchase price, you'd pay $879 a month at a 6% rate, but only $743 a month at 4.5%. Assuming that you don't try to buy more house than you can afford, presumably you will have more money to buy other goods, like a car or washing machine. Boosting the bottom line of retailers will help save jobs, which must happen before the economy can get back on track.
Cons: If, tempted by low rates, you take on a bigger loan than you can afford, at a time when jobs are being erased, you're not just putting your financial future at risk -- you're reaffirming the whole free-spending, McMansion-loving culture that created this mess in the first place.
Employers have cut 1.2 million jobs this year, sending the unemployment rate to a 14-year high of 6.5%, and economists expect that the rate will be higher when the Labor Department announces November's numbers on Friday.

The bottom line: If you can get a lower fixed-rate loan than you have now, either for a new purchase or a refinance, you'd be foolish not to take it. But there's no reason that you have to use the money for a bigger house, or a bigger loan. Downsize your expectations, your home and your debt, and you'll be better prepared if you yourself are downsized...more