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