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Refinancing: Don't Waste Time Wondering, Just Do It
Interest rates on mortgages continue to fall, and you don't know whether it pays to hop on the refi bandwagon? Many people say rates need to fall more than one or two percentage points lower than the rate you're currently paying for a refi to pay off, but some experts now maintain that any rate lower than your current rate could make a refi worthwhile, under the right conditions.


"If you're not changing the term of your loan ... even dropping your rate by an eighth makes sense because you did not have to change anything to get a loan," says Bob Walters, chief economist for Quicken Loans. "It always pays to get a lower rate." Say the current balance of your 6.5%, 30-year fixed mortgage is $250,000 and you are making monthly payments of $1,800. If you refinance into a loan of the same size, that's one percentage point lower -- 5.5%. You've dropped your monthly payments by about $380 to $1,419.47. But let's say you want to take out extra cash to pay off $20,000 in credit card debt: You'll need a new loan of $270,000. And even with that higher amount, your monthly payments are still reduced about $267 from your current payments to $1,533 a month. In either scenario, it would take you less than a year (five months and seven months respectively), to recoup about $2,000 of closing costs.


To determine how your monthly mortgage payments will differ under a new loan, use a mortgage-refinance calculator to determine the savings you might receive.


Having a good idea of what interest rate will best suit your budget will give you a good starting point for conversations with your mortgage broker.


"I'm starting to get refi calls from savvy Wall Streeters -- one just now whose ARM at 4.875% readjusts in 2011 -- saying that if I see something at 4.75% or better, he's ready to refinance," says Ellen Bitton, president and CEO of Park Avenue Mortgage Group. She adds that she just quoted a conforming 15-year fixed-rate mortgage at 4.5% to someone else.


"I'm sure that with the Fed reducing rates an almost unprecedented 3/4 point... mortgage rates must be coming down further," she says. "Also, home equities will come down by 3/4 pt [as they are] directly tied to the prime rate."




Many homeowners seem to be seriously considering refinancing their current mortgage. Refinance applications have nearly doubled since the beginning of November, says Jay Brinkmann, vice president of research and economics at the Mortgage Bankers Association.


Many people may worry about refinancing, thinking that when they change to a new 30-year loan from their current loan, which may have only 20 to 25 years left on it, they will not have any savings, given they are adding years to the life of their loan.


"That's a myth that people run up against," says Walters, who points out that people can save money in the long run if they refinance but don't reduce their monthly payments. "If they keep making the same payment they always had, even if their monthly amount is now reduced under the refinance, they will pay their loan off faster because more money is going toward principal."


Whatever the reason homeowners are seeking it refinance, more of them are doing so. The refinance share of mortgage activity increased last week to 66% of total applications from 62.7% the previous week, the Mortgage Bankers Association reported Wednesday. Homeowners hoping to refinance their current mortgage helped drive mortgage applications up 8.4% last week compared with a year earlier.


"With tighter credit conditions, we do not know how many of these applications will become loans, but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since Nov. 2 across products," said Brinkmann.


A basis point is a hundredth of a percentage point.


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