Record-low mortgage rates are creating unique opportunities for borrowers willing to take short term losses to make long term gains. TheTruthAbout/Flickr photo.

Record-low mortgage rates aren’t jump-starting the U.S. housing market. However, record-low mortgage rates and a real estate slump that is driving down home prices present unique opportunities, even for people whose mortgages are under water. With mortgage rates and home prices so low, brave borrowers are taking short-term losses to make long term gains. People are taking a loss on their current homes, trading up and coming out ahead. Others are learning that spending their own cash to refinance mortgages is one of the safest investments to make these days.

Record-low mortgage rates and the U.S. housing market

With the U.S. housing market in the toilet, the Wall Street Journal reports that economists say trading up to new homes or refinancing existing ones can make good financial sense — even if it means giving up cash to get out of an underwater mortgage. By writing a big check to retire an old mortgage, people living in less-desirable neighborhoods might be able to find much better homes in a location where the home’s value will appreciate more. And with mortgage rates so low, these buyers can keep their monthly payments manageable, even though the new homes are more expensive.

Cash-in refinancing versus cash-out refinancing

Typically, people refinance to “cash out” some of the equity they’ve built up in their homes over the years so they can use the cash. However, the Los Angeles Times reports that record low mortgage rates are making cash-out refinancing passe and “cash-in” refinancing very popular. With savings accounts and other investments yielding little or nothing in profits these days, it makes sense to move that cash into a home, especially if it knocks a point or two off the mortgage rate. In last year’s fourth quarter, a third of all borrowers who refinanced mortgages lowered their principal balances by putting money into the deal rather than taking it out.

Smart real estate investing

Some people are opting to pay down their mortgages early. Totalmortgage.com reports that interest saved is interest earned. Paying down a mortgage — even an underwater mortgage –  early is essentially equal to putting that money in something that yields an equivalent return to the borrower’s mortgage rate. Real estate investing like that is a breath of fresh air these days. Other borrowers are taking advantage of record-low mortgage rates to refinance from 30-year fixed mortgages into shorter-term mortgages (15 or 20 year fixed). This sets them up to save thousands of dollars over the life of their loans, and their monthly payments are lower than they were before.