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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 paying attention.

"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 one.
  • You want to shorten the number of years on your loan.

Jumbo to conventional
Getting rid of a "jumbo" loan can save, says 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 rate.

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."

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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 McBride.

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 loans.

"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."

Get moving
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."

-- Updated: March. 20, 2003
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See Also
Rate Trend Index:
Find out which way rates are headed
The 10 biggest home-buying mistakes
When NOT to refinance
More mortgage stories

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