Prompted by the drop in mortgage rates, a race is on to refinance existing home loans. Refinancing activity is up as much as 25 percent at some lenders. Some institutions say it now constitutes more than 70 percent of their overall loan activity.
While refinancing can cut your monthly payments significantly, it isn't for everyone.A general rule of thumb is that refinancing should decrease your mortgage rate by at least 2 percent in order to make the cost of obtaining a new loan worthwhile. In addition, you should probably be planning to stay in your home at least three years. However, it's still a matter of evaluating your own financial situation. Even a 1 percent decrease in your mortgage rate might make it worthwhile if you plan to stay in your home for a long time.
It's easy to see what the excitement is all about.
Rates on 30-year fixed mortgages have slipped to around the 9 percent level in recent weeks, an attractive rate not seen since the first quarter of 1987. They'd averaged over 10 percent most of the time since that last major dip, except for the second half of 1989 and second half of 1990, when they slipped a fraction below double digits.
Some experts say we could see another decrease of one-quarter to one-half of a percent. But rates are already low and, whether that decrease occurs or not, now's the time to be shopping around.
"We're seeing refinancing activity from homeowners who feel they can lower their payments, from those who have adjustable mortgages, and from those looking to take some equity out of their homes by increasing their mortgage size," observed Scott Johnson, a customer service manager with Citibank.
Consider the results of refinancing an existing $100,000, 30-year fixed-rate mortgage. At 11 percent, current monthly payments are $952, compared to a new 9 percent mortgage's payments of $805. Refinancing would mean a reduction in monthly payment of $147. In the situation of a 12 percent mortgage of the same size with a $1,029 monthly payment, savings by refinancing to 9 percent would be $224 a month.
Next, take a look at an existing $150,000 mortgage at 11 percent with monthly payments of $1,428. A refinancing to 9 percent would result in a $1,207 monthly payment. Monthly savings would be $221. Or, if you start out with a 12 percent mortgage and $1,543 monthly payment, the savings through refinancing is $336 a month.
Refinancing doesn't come cheaply. You'll likely have to pay a $300 application fee, closing costs of $260 and title insurance of $400 on a $100,000 mortgage. Most importantly, there is the loan origination fee, or so-called points, ranging up to 2 or 3 percent of the loan, with the lender likely to charge more points if he's giving you the lowest rate. All of this could bring your total refinancing costs to as much as $4,000.
"Refinancing costs make it important to ask yourself honestly how long you expect to live in the property," said Daniel Kozor, regional manager with Preferred Mortgage Associates in Lombard, Ill. It also makes it important to shop among several institutions, since factors such as points and interest rates do vary.
Kozor points out that you'll have to produce documentation as you would when obtaining an original mortgage. That means providing your two-year tax history; a legal description of the property; records of your checking, savings and investment accounts; and information about your existing mortgage, car loans and credit card accounts. There are tax considerations, too.
"Keep in mind that the points paid when refinancing aren't fully tax deductible in the year they are paid, as in the case of an original mortgage, but must be amortized over the life of the loan," cautioned Barbara Pope, tax partner with Price Waterhouse. Furthermore, a lower interest rate means a smaller deduction for home mortgage interest come tax time.
"While it's on the upswing, the refinancing market isn't as big as it was in 1986 and 1987, because so many homeowners have already refinanced," observed Michael Wilson, deputy research director with the U.S. League of Savings Institutions.