Mortgage Refinancing: Not Too Late to Refinance |
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If you took a house with a 30-year, fixed-rate mortgage at about 8.3%, you can get it refinanced on an 18-year loan at 7.2% with a mortgage refinancing program. The closing costs can be rolled over into the new loan, equaling one month's mortgage payment. This way, the payment might actually go up slightly, but the equity will get to be built much faster. When the rates get further slashed, you can start thinking about another mortgage refinancing loan, maybe into a 15 or 10-year loan. Fortunately, you don't have to worry about timing the bottom, either. It still makes sense especially if your rate is above 7.5%. Refinancing to a rate between 6.5% and 7% is still a pretty good deal, says Frank Nothaft, deputy chief economist at Freddie Mac, which buys mortgages for resale on the bond markets. He expects rates to stay in that range for a while. Mortgage refinancing is beneficial for you if you can lower your monthly payment and recover the closing costs before you move or refinance again. Take the total cost of the mortgage refinance and divide it by your monthly savings. This will tell you how many months it will take to recover your costs. If you have a $200,000 30-year loan with a fixed rate of 7.5% it is not advisable to refinance it to 6.8% with no points and $2,600 in fees. This will anyway roll over into your new loan amount. Mortgage refinancing will lower your monthly payment by $77 and will take 34 months to break even. Many mortgage refinancing companies are replacing 30-year loans with 15-year mortgages, which offer about half a point break on the interest rate compared with the 30-year term. Rates on 20-year mortgages fall in between those two. A $200,000 30-year fixed loan at 6.7%, for example, carries a payment of $1,291 per month. Reducing the term to 15 years with an interest rate of 6.37% will cost $440 more per month. Although shorter-term mortgages, save a lot in interest over the life of the loan, your monthly payments will be higher. You may actually benefit if you get a 30-year loan and invest the difference. Still, shorter-term loans can be a good idea for people who'd like to get rid of their mortgage in time for retirement. For people trapped in an adjustable-rate mortgage, it is advisable to convert it with mortgage refinancing into a new fixed-rate loan. Usually the first year of an ARM is artificially low, and you could be in for a full two-point rise after completing the first year. That puts you roughly at today's 30-year fixed rate. With rates at a historical low, it's better just to go to a fully amortizing 30-year fixed rate, says Brown of Countrywide. Most refinancers choose a no-points loan--partly because the prepaid interest on mortgage refinancing is not immediately tax-deductible as it is on a home-purchase loan. You have to deduct them over the life of the loan. But a no-points loan doesn't necessarily mean a no cost loan. If it's a zero-point loan, we usually tell them to expect $2,600 in fees, says Cook, the mortgage broker. Most refinancers simply add the fees to their new loan balance and pay the loan off over time. Some lenders do offer a no-cost loan, but you pay a slightly higher interest rate. Fees cover such services as document preparation and notarization, title insurance and paying off the old loan. You must make sure you're getting a mortgage refinancing rate on your title insurance, which could be half the cost of a brand-new policy. You may be able to use an existing survey and save on that cost, too. If your home's value has appreciated since you bought it, either because of rising property values or because you have renovated it wonderfully, you may have equity worth 20% or more of the value. If so, you won't need private mortgage insurance on the new mortgage. It's possible to keep a home-equity line of credit in place when you get a mortgage refinancing. But if your home-equity interest rate is prime (8%) or above, you'll save money rolling the balance on your home-equity line of credit into a new first mortgage lower than 7%. Some lenders will hesitate if you don't have at least 25% equity left in the home after taking out cash to pay off the home-equity loan or another loan. But others will let you take cash out with only 20% equity, says Cook. |
