As mortgage rates slide toward 7 percent, homeowners have the best opportunity in quite a while to refinance higher-rate mortgages, giving themselves more cash for saving or spending.
Indeed, rates now are at such attractive levels that homeowners may have the first chance in perhaps four years to move to a lower-interest-rate loan without having to worry too much about closing costs and related fees. Typically, these expenses gobble up a big chunk of the initial savings when a homeowner moves to a lower-cost loan–sometimes making refinancing unattractive unless the borrower plans to keep the home for years to come.
But at current interest rates, homeowners can afford to consider a couple of alternatives that were less appealing when rates were higher. One option is to pay a slightly higher interest rate–a quarter of a percentage point or more–in lieu of some or all of the loan costs. Alternatively, the costs can be rolled into the principal.
Countrywide Home Loans, one of the nation’s biggest lenders, says such low-cost refinancings now make up about half of its refinancing volume, but many homeowners don’t consider the option.
“To do a no-cost loan, you have to explain it to people and pique their interest,” says Alan Rubin, senior loan officer for Alpine Mortgage Services Inc., a Seattle mortgage broker and banker.
The average rate on 30-year conventional mortgages dropped to 7.24 percent in mid-December, according to HSH Associates, a Butler, N.J., mortgage-information service.
With rates now well below last spring’s 8 percent, homeowners are clamoring to refinance. More than 41 percent of all mortgage applications in recent weeks were refinancings, compared with less than 30 percent earlier this year, according to the Mortgage Bankers Association of America.
Today’s low rates are especially enticing for homeowners with mortgage rates of 8 percent or more and those who hold adjustablerate loans tied to one-year Treasury rates. Those loans, if adjusted today, probably would carry rates well above 8 percent.
Todd Shaw, an Ankeny, Iowa, mortgage broker, wanted out of a mortgage that started at a low rate but required refinancing after seven years. He chose a 7.25 percent 15-year mortgage, which boosted the monthly payments on his four-bedroom house by more than $200 a month. He figured the shorter loan would save him money over the long run and chose a higher interest rate to keep his out-of-pocket costs to a minimum.
“I locked in a low rate, and my cash flow can take it,” he says. “When my 3-year-old goes to college, I’ll have the house all paid off.”
Such choices were common in the “refi boom” of 1993, when 30-year fixed-rate mortgages actually fell below 7 percent for some time and refinancings pushed mortgage sales to record levels. At that time, 15-year rates were much lower than 30-year rates and many homeowners found they could choose a 15-year loan without increasing their monthly payments. In some cases, monthly payments even went down.
This time around, however, short-term rates aren’t all that much better than 30-year rates.
It pays to shop for the best deal.
“There are so many mortgage brokers and bankers looking for business out there,” says David Lereah, chief economist for the Mortgage Bankers group. “The benefit is to consumers, because they can find lower points and lower rates.”
