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Refinancing a mortgage still can make sense

Mortgage rates have jumped since hitting a 40-year lows, slowing the refi boom that kept mortgage offices crowded in 2002 and 2003.

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Although rates have increased, situations still exist where it makes sense to refinance. You still could grab a lower rate by replacing your 30-year loan with a 15-year loan or by getting an adjustable-rate mortgage. Or, if you pay mortgage insurance, you could refinance to get rid of that.

These strategies don't apply to everyone. But with luck, one will work for you and you can save money.

The 15-year solution
You won't immediately save money by switching from a 30-year to a 15-year loan because you will pay more each month. But over time, you save thousands of dollars in interest. Replacing your 30-year loan with a 15-year loan makes sense if you can afford the higher monthly payment and if you plan to live in the house for a long time.

In's weekly mortgage survey conducted March 10, 2004, the 30-year rate nationwide averaged 5.44 percent and the 15-year rate averaged 4.76 percent. Let's say you owe $150,000 on your home loan. If you refinanced into a 30-year loan at 5.44 percent, you would pay $846.05 in principal and interest each month. With a 15-year loan at 4.76 percent, the principal and interest would equal $1,167.52 a month.

The 15-year loan costs over $300 a month more, but it gets paid off 15 years sooner. By paying more sooner, you save $94,000 over the life of the loan by getting a 15-year mortgage instead of a 30-year.

"Fifteen-year mortgages are for people who are trying in earnest to be debt-free," says Ellen Bitton, president of Park Avenue Mortgage in New York City. "They have no issue with making the higher payments now."

People who plan to retire within 15 to 25 years might find 15-year mortgages especially attractive if they can afford to save for retirement while making the higher house payments.

The adjustable option
Other folks know they'll move out and get another house long before their loan repayment period has ended, and they want lower payments now. If that describes you, consider an adjustable-rate mortgage.

ARMs come in many flavors. The one-year ARM, which adjusts after 12 months and annually thereafter, averaged 4.10 percent in the Aug. 6 survey of large lenders. Hybrid ARMs have a longer initial interest rate -- usually three, five, seven or 10 years -- and adjust annually after that initial period.

If you think you'll sell your house within five or six years, a five-year ARM might work best for you. The rate on a five-year ARM stands somewhere between the rates for one-year ARMs and for 15-year fixed-rate mortgages.

Adjustables have gained in popularity since mortgage rates began rising in late June. In exchange for getting a lower rate now, you risk paying a higher rate in the future. Don't get an adjustable if that risk will keep you up at night.

A refi can get rid of PMI, too
Finally, one overlooked reason to refinance, even at only a slightly lower rate, deserves mentioning: getting rid of mortgage insurance. You probably pay for mortgage insurance -- usually referred to as private mortgage insurance or PMI -- if you made a down payment of less than 20 percent.

Home values have risen rapidly in the last three years, possibly enough to push your equity above the 20 percent threshold. A hypothetical example: You bought a house three years ago for $100,000 and made a down payment of $7,000. Now, because of rising property values in your neighborhood, you could sell the house for $115,000.

That $15,000 in increased value goes straight to your equity. Now your equity consists of that $15,000, plus the $7,000 down payment, plus roughly $3,000 from your mortgage payments. You have $25,000 equity in a house worth $115,000, exceeding the threshold of 20 percent equity. By refinancing, you save money by eliminating the monthly mortgage insurance premium.

And finally (as usual), procrastinators
Chuck Holroyd of mortgage giant IndyMac Bank points out other reasons to refinance, even with today's higher rates. "There are still people who are in the money for rate-and-term refinancing," he says. In other words, plenty of procrastinators still haven't refinanced, even though they could have done so, profitably, in the last year or two.

Holroyd identifies another group of potential refinancers: borrowers with adjustable-rate loans. If you have an ARM and you believe the rate will spike the next time it adjusts, you can refinance with another ARM or with a fixed-rate loan.

-- Posted: March 17, 2004




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