More reasons to refinance than just low rates
When mortgage rates fall below the 7 percent mark,
it is boom time for refinancing. Still, for every person who's calling
to refinance, there are probably two or three other people who aren't
"Realistically, a vast majority of people close
their loans, make their payments and don't worry about it again,"
says Bob Cannon of BancMortgage Financial Corp. "They don't refinance
when they should be looking at it."
Those people should look again. Refinancing a mortgage
means looking at all your options -- not just the interest rate.
You also may want to look at refinancing if:
- You have a jumbo mortgage and can switch to a conventional
- You want to shorten the number of years on
Jumbo to conventional
Getting rid of a "jumbo" loan can save, says Bankrate.com financial
analyst Greg McBride. Jumbo loans are those that are above the limits
set by Freddie Mac and Fannie Mae -- the quasi-government agencies
that buy and sell mortgages in the secondary market. They trade
in "conventional" mortgages below that limit. Jumbo mortgages are
those above that figure, and they carry a slightly higher interest
McBride gives the example of a homeowner
who took out a jumbo mortgage for $270,000 when the maximum conforming
single-family mortgage was $260,000 - a few months later it was
raised to $300,700. The loan was for 30 years at 8.1 percent.
"The monthly payment," says
McBride, "would be $2,000. (If rates are lower when) you refinance,
that loan now counts as a conforming loan so you can get the lower
conforming rate. (If the rate) is 6.92 percent, you save $218 on
the monthly payment. Even if the refinancing costs you 2 percent
of the loan, you can break even in approximately two years."
Making the jump
Jumping from jumbo to conventional means getting a lower rate. In
the example above, McBride says, 25 percent of the savings is because
the homeowner refinanced from a jumbo to a conforming, while 75
percent is due to lower interest rates.
Go from 30 to 15 --
consider the options
Suppose you bought a 30-year fixed rate mortgage seven years ago
for $125,000 at 9 percent? Your monthly payment is $1,005.78 and
your balance is $117,000. You'd love to knock down that 9 percent
a couple of notches, but instead of refinancing the 30-year mortgage
at a lower interest rate, McBride suggests going for a slightly
higher monthly payment and refinancing to a 15-year mortgage.
"(If) the national average is 6.41 percent,
your monthly payment would be $1013.42, but you'll pay off the home
eight years sooner. You're not looking at a significant change in
payment, but you are looking at a big savings in interest," says
Mature mortgages defy refi
For those who have old mortgages, the strategy is different. If
you took out a $100,000 loan 25 years ago at 9 percent, your balance
would be just under $40,000 and it would be tempting to refinance.
But McBride says it might not be worth it.
"At this point you're paying so little interest.
If you refinance, what does it do to your payback period? If you
refinance from 9 percent to 7 percent it shortens your payback period
by three months. It saves you $2,400, but that's not factoring any
costs you may incur for going through the refinancing."
Instead, he says, those with old
loans should consider principal-only payments -- payments above
your normal monthly amount.
Bob Cannon at BancMortgage says there's no
question principal-only payments will save you a lot of money, but
he says a lot of his clients are refinancing with interest-only
"They pay no principal. That's driven from
when interest rates are historically low. Can you invest your money
better than by paying down your house? People are leveraging their
houses to take advantage of one of the last write-offs we have."
Although this is a hectic time for refinancing, whatever route you
decide to go, it may be wise to find a reputable mortgage lender
and give him or her a chance to do the job.
"If consumers really want to help themselves,
they need to stop calling 20 different lenders -- work with one
and let them work for them," says Jim Bradley of American Residential
Lending in Atlanta.
"Make some kind of commitment. People think
they can get a mortgage like buying a can of paint at Sears. We
work very hard at what we do. Help yourself; allow us to help you."