The "Pure Savings " refinance
By Michael D. Larson • Bankrate.com

The Federal Reserve Board's surprise interest rate cut at the beginning of January spurred a lot of people to look into refinancing. Among them were Tom and Sandee Alo, who live near San Diego. They bought their home shortly after mortgage rates peaked last May using an "80-10-10" loan setup. That's when customers get first mortgages for 80 percent of the value of their homes, second mortgages for an additional 10 percent and put 10 percent down.

The Alos want to save at least $250 a month. That way, they can put extra money toward the second mortgage and get rid of it in as little time as possible. It's a relatively lofty goal, given their loans are only seven months old. But depending on how they proceed, it is possible.

"We would like to pay off our second mortgage a lot sooner than the 15-year term," says Tom. "Our old mortgage did not stretch us too thin, however, with the cost savings of refinancing we now can live life without too many worries."

With rates down, Tom adds, most borrowers should be able to find at least one way to save money.

"The process has not been confusing at all. In fact, it's somewhat identical to the 'adventure' we experienced when we were purchasing our home," Tom says. "My advice to those who are considering refinancing is: no matter how much time it will take, do your 'refinancing' homework. Also, don't focus in on just one solution; open your mind and consider all possible solutions."

"All your hard work will definitely pay off in the end ... most likely in your pocket!!!"

Here's a comparison of their current mortgage and how one example of an 80-10-10 style of mortgage would work. By the way, if you're doing the math at home, the Alos' exact loan-to-value breakout doesn't come out to an exact 80-10-10 split. To avoid paying higher "jumbo" rates on their first mortgage, they needed to have a slightly smaller first mortgage and a slightly larger second mortgage.

What other borrowers can learn from the Alos
Refinancing can provide many benefits, but the one most borrowers look for is lower monthly payments. The Alos, for instance, can slash their monthly mortgage bill by almost $200 by converting some of their high-cost second mortgage debt into lower-cost first mortgage debt and by lowering the interest rates charged on both loans. They should be able to recoup their up-front closing cost investment in about a year and a half.

Borrowers who used 80-10-10 loans to get into homes may be able to cut their bills in other ways too. The Alos are very close to a loan-to-value ratio of 80 percent, and if they can find a way to come up with another $5,200, they'll be able to lower their LTV below that mark.

That would allow them to get a 10/1 hybrid ARM or 30-year fixed jumbo loan for $320,000, get rid of their second mortgage and eliminate the need for private mortgage insurance altogether. The 10/1 ARM would have a rate of 7.125 percent and a payment of $2,156 -- $303 less than the Alos are spending now. The 30-year jumbo would have a rate of 7.5 percent and payment of $2,237 -- $222 less.

"Those are probably the three best options and they're really based on a couple questions the consumer has to answer -- how long do they plan to keep the house, as well as can he afford to reduce the principal balance," says Gotsch, who reviewed the Alos' data.

"You need to do a break-even analysis of the cost incurred vs. monthly savings to make sure you're in that house for a time frame that meets or exceeds that amount."