I think this is a very good proposal. Here's why:
Right now interest rates on a 30-year mortgage are around 3.25%. Now, I purchased a home in April of 2009 and our interest rate was 4.625. Last October, we refinanced and took out a 20-year mortgage at 3.75%. We refinanced after the announcement of QE1 and operation twist. I follow the markets fairly closely and both times felt confident that interest rates would not, could not go lower. Fast forward less than a year and interest rates have dropped again. I could take out a 20-year (or 30-year) mortgage today at 3.25%. Again, I find myself asking, are rates going to be lower. Is it worth the hassle of doing another refinance. What if rates go down again? What if my appraisal comes in much lower than previously?
Now if I know interest rates are going to stay at 2.5% for the next year the uncertainty is removed and further it will help spur home sales. I can take my time with my refinance, get my paper work together, and not worry about a low appraisal.
Now, does it make a difference? Suppose you were looking at financing a home and needed to borrow $300,000 under a 30-year note here are your payments:
As you can see, the payments drop significantly, anyone else think that would be a huge boost to the economy? One, side note. A number of people are unable to refinance because they are underwater or have lost a considerable amount of equity. If you do not have 20% equity you must pay mortgage insurance. That could add an additional $100-150 per month to your mortgage. The government needs to change this. If someone has been a good borrower and not missed a payment over a significant period (3+ years), they should not be required to have mortgage insurance. The government should accept this risk, its the least they can do to homeowners.