No matter whether a recession is coming, going, or already here,
the rocky economy does offer a small consolation to homeowners and
house hunters: lower interest rates. During the past year, the
average 30-year fixed-rate mortgage has fallen from a high of 8.7
percent to below 7 percent recently. For some that dip could
translate into hundreds of dollars of savings each year. But is
refinancing right for you? That depends on the monthly savings it
provides, how long you plan to stay in your home, and how much you
are willing to add to your long-term debt load.
WHEN IT'S SMART
In general, if you are paying at least one percentage point above
the going rate, it makes sense to consider refinancing. If you
have an adjustable-rate mortgage, this is a good time to switch to
a fixed-rate and lock in a low rate. But remember — refinancing is
not just about lowering your monthly payments. You must ultimately
balance reduced payments with the overall cost of a new loan.
Refinancing might be for you if...
You need to reduce your monthly debt.
You've had your loan for less than seven years and have not
paid off much of the principal.
You plan to stay in your home long enough to be able to recoup
your refinancing costs.
If you meet these three criteria, go to the worksheet. Refinancing has many of the costs that first-time mortgages
do, and those can average 3 percent of the total amount you borrow
(that's $3,000 on a $100,000 loan). A no-cost loan frees you from
closing costs, but your interest rate will be slightly higher.
WHEN IT'S NOT SMART
The downside to refinancing is that you prolong the agony of your
debt. Over the short term, you will enjoy lower monthly payments,
but over the long term you'll most likely increase the total
amount of interest you pay out. And that could be thousands of
dollars more.
Refinancing might not be for you if...
Your current interest rate is less than one percentage point
above the going rate.
You plan on selling your home in the next year or two.
You care more about your long-term debt load than about reducing
your current monthly payments (see the example on the next page).
ANOTHER OPTION: SHORTEN THE TERM OF YOUR LOAN
If having extra money now isn't a priority, then consider trading
in your 30-year loan for one with a shorter term, like 15 years.
This way you will take advantage of lower interest rates while
decreasing your total outlay. "If your ultimate goal is to save
money in the long run, shortening your term is the best way to
go," says Keith Gumbinger of HSH Associates, a publisher of
mortgage-rate information.
Let's say you took out a $150,000 30-year mortgage back in 1994
at 8.5 percent and your monthly payment is $1,153. If you
continued on with your original loan, you'd pay $265,213 in
interest over the life of the loan. But if you refinanced the
remaining $139,619 today at 6.25 percent and reduced the term to
15 years, your monthly payments would rise almost $44, but
overall you'd save $102,848 in interest payments. For ponying up
an additional $525 a year, that's huge.
FIND THE BEST DEAL
Start with your current mortgage lender. That's where you may find
the best rates and the smallest stack of paperwork. In order to
keep your business, your lender might even waive a new appraisal
fee. Then call a couple of local mortgage brokers and banks to
compare rates.
Be sure to ask about no-cost refinancing. Most lenders offer this
option and will help you determine which loan is best. If you have
been a reliable borrower, inquire about a loan modification from
your existing lender. Your lender will adjust the interest rate on
your mortgage; your fees will be minimal, and your paperwork
almost nil.
