Whether or not it makes sense to refinance depends as much on your particular circumstan-ces as rate movements.
Forget gourmet kitchens or whirlpool tubs. They hardly rate as a home style trend when compared to what homeowners really made the rage in 2001: a brand new mortgage.
Some $1.2 trillion of mortgage loans were made to refinancers last year, reports John Bancroft, managing editor of Inside Mortgage Finance, an industry newsletter based in Bethesda, Md. That’s about one-fifth of the value of all mortgage loans outstanding.
The refinance rage peaked in November, when interest rates dipped to a 30-year low of 6.59 percent for 30-year, fixed-rate mortgages. For homeowners who didn’t join their neighbors in refinancing, it may feel that to refinance now is like trying to find last year’s fashions.
But experts say interest rates, while higher than in November, are still relatively attractive. Homeowners can refinance and save money anytime they lower their monthly payments enough to offset the charges involved in the refinance procedure. The Mortgage Bankers Association predicts that mortgage rates will average 7.1 percent for 30-year fixed loans during the first half of this year, rising to 7.5 percent in the second half, says Doug Duncan, chief economist of the trade group in Washington, D.C.
As rates head upward, lenders will stress alternatives to fixed-rate loans like adjustable mortgages, which carry temptingly low initial interest rates. However, borrowers who take these lower rate loans also assume risk that the rate will later jump. Moreover, some homeowners have very sound reasons not to join in on the refinance rage . Holding on to a comfortable old loan that they have had for a decade or more means that those homeowners can plan on paying off their entire debt in the not-too-distant future. Whether or not you’d like to refinance now depends on a few key considerations, Duncan explains. “The crude rule of thumb is to [take what you’re paying] right now in principal and interest . . . then calculate what your principal and interest payment would be under the new rate and see how much you’ll save each month. If you plan on staying in your house long enough that you’ll recoup the costs of refinancing through the monthly savings, then it may be worth it to refinance.”
The Internet is littered with mortgage and real estate sites that help homeowners calculate monthly principal and interest payments for loans at different rates, Duncan adds.
He underscores, however, that comparing monthly costs doesn’t take into account the impact of extending a mortgage anew for 30 years.
“Many people aim to pay off their mortgage by retirement,” says Carol C. Pankros, a fee-only financial planner in Palatine. Someone in their early 30s, for instance, needs low monthly payments and won’t worry about refinancing into a new 30-year loan, while a 55-year-old will cling to a loan he or she has been paying on for many years, as long as the rate isn’t too high — over 8 percent, for instance, Pankros says.
Many older borrowers take a conservative approach and if they refinance at all they take out a a 15-year fixed loan instead of a 30-year, says Chris Larsen, CEO of E-LOAN Inc., an online brokerage based in Dublin, Calif.
The conservative borrower who worries about extending his term is at one end of the spectrum, while at the opposite end is a borrower who’s not concerned about extending his mortgage loan term, and is intent on finding the lowest possible monthly payment. The bargain-hunting borrower, Larsen says, is willing to take on the risk of an adjustable loan that has low initial rates that could later rise.
Besides adjustable loans, lenders are also beginning to offer “interest only” loans, which offer rock-bottom payments for an initial period, Larsen adds.
Most homeowners, however, don’t like to take risks and refinance into a fixed-rate mortgage, Duncan says.
Adds Pankros: “I don’t think most people like to keep watching interest rates and keep thinking about refinancing.”
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