Is
it The Right Time to Refinance Your Mortgage?
If you’re still kicking
yourself for not having taken advantage of this past October’s bargain
interest rates, the time may still be right to refinance your mortgage. This
information will help you decide if refinancing makes sense for you now, and
will also help you choose the best available refinancing options.
First, Do the Math
If you’re currently holding
an adjustable-rate mortgage, a balloon mortgage or a fixed-rate mortgage, and
you’re paying interest at a rate of more than 7.5 percent, you still may be
able to cash in. Start by adding your up-front expenses: points and any other
closing costs. Next, calculate your monthly savings by subtracting the new,
lower mortgage payment from your current monthly payment. (A lender can tell you
what your monthly payment will be, based on the new mortgage, or you can get
that number by using one of the many mortgage calculators available online on
the Internet.) Dividing the up-front costs by your monthly savings will tell you
how many months it will take to recoup your expenditure. If you will be in your
house longer than that, it pays to refinance. One more thing to keep in mind as
you number-crunch: lower interest payments mean smaller tax deductions.
Choose the Mortgage That’s Right for You
Points or no points? With a
no-points loan, you’ll typically pay a slightly higher interest rate. If
you’re trying to preserve some cash, you may want to go with this option.
However, if you plan to stay in your home for a lengthy period of time, it will
pay to choose a lower interest rate with points.
Short-term or long-term?
Although short-term mortgages save a lot in interest over the life of the loan,
your monthly payments will be higher. You actually may come out ahead if you get
a 30-year loan and invest the difference. Still, shorter-term loans can be a
good idea for people who’d like to pay off their mortgage in time for
retirement or to meet major expenditures such as college tuition costs.
Fixed or Adjustable?
The spread between fixed- and
adjustable-rate mortgages (ARMs) is so small these days that it probably makes
little sense to go with the lower-interest ARM, unless you know you will be
selling your residence within one year. However, you may want to consider the
so-called “hybrid” ARM. These loans stay fixed for the first five, seven, or
10 years, then begin adjusting. If you know you are going to be in your house
for a finite period of time, you may be able to get a break with this type of
mortgage.
Good News on Jumbo Loans
Up until the end of 1998, the
maximum loan that Fannie Mae would accept on a single-family house was $227,150.
Crossing this threshold puts you in jumbo-loan territory – which typically
carries interest rates 0.50 to 0.75 of a percentage point higher than loans that
conform to the $227,150 limit. However, on Jan. 1, 1999, Fannie Mae raised the
permissible maximum loan to $240,000. This increase presents a substantial
savings opportunity for homeowners who want to swap their jumbo mortgages for
conforming loans. And, for homeowners who are within striking distance of the
new $240,000 figure, it might even make sense to use cash available to pay down
the existing mortgage enough to be able to refinance at conforming-loan levels.
Other Ways To Save
If your loan is less than two
years old, your original lender may be able to offer a loan modification. This
quasi-refinance is an agreement to lower your rate without having to go through
the whole mortgage application process. If you do decide to refinance completely
using your existing lender, you may be able to do a “streamlined refinance,”
which will let you save on fees and closing costs. The lender may be willing to
reuse your appraisal, for example. However – don’t assume your current
lender is going to offer you the best deal just to keep you. Take the time to
shop around.
Finally, try to get whichever lender you decide to
go with to commit to a locked-in rate from the time of application to the day
the loan is closed. And ask about a “float-down,” which gives you the
opportunity to take advantage of a drop in rates. If rates do drop, you can
re-lock, typically 10 days before closing.