Time to refinance may be now

Mortgage rates falling toward 30-year lows


— Home mortgage rates are approaching 30-year lows and that's a signal that some homeowners should be investigating refinancing their mortgage to take advantage of the lower interest rates, some lenders say.

Throughout much of February, rates for a 30-year conforming mortgage (one in which the homeowners are borrowing less than $275,000) have hovered around 7 percent and dipped to about 6.75 percent at the middle of last week. Most mortgage lenders say home lending rates have been very volatile thus far in 2001.

"If you're in the 8-percent range, you're definitely in the refinancing range, no doubt about it," Gil Lang said this week. He's a loan officer specializing in mortgage lending at Vectra Bank Colorado in Steamboat Springs.

Typically, Lang said, people who are making payments on a conventional mortgage need to realize a difference of 1 percentage point in interest before they can justify investing about $1,500 in the refinancing process. However, people with a jumbo loan, one that's greater than $275,000, can start thinking about refinancing sooner.

"If I have someone come in with a $400,000 loan and interest rates are a half-point lower, the difference in their monthly payments is astronomical," Lang said.

For example, if you originated that $400,000 mortgage at 8 percent and can lock in at 7.5 percent, you'll realize a drop of $140 in your monthly payment, Lang said.

Holders of jumbo loans also should check to find out if their jumbo loan is still jumbo. The limit homebuyers can borrow on a conforming basis was raised to $275,000 from $252,700 last year. The bigger loans command an interest rate about 0.375 percent higher than conforming loans. People whose loans are below $275,000 may have an opportunity to refinance and save money.

People with adjustable rate mortgages also should take a close look at current interest rates. Typically, home borrowers with an adjustable rate might have a loan structured to give them a guaranteed rate, say 7 percent for the first five years. But beginning with the sixth year, the interest rate is allowed to float 2 percent in either direction, meaning there's a chance their mortgage rate could rise with the prevailing rates to as much as 9 percent in the future. Someone in that situation today has an opportunity to refinance and lock in that favorable 7 percent rate for 30 years, and they ought to jump at the chance, Lang said.

Mary Crotz, a mortgage loan originator with Alpine Bank, said she has clients who are moving in both directions both in and out of adjustable rate loans. The decision depends a great deal on the long-range plans of the homeowner, she said. Or more precisely, what they plan to do within the next five years.

"Five years is kind of a magic number because it takes that long to make up the closing costs" associated with refinancing, she said.

People who are planning within the next five years to upsize to a larger home, remodel their existing home or relocate to another city might still consider going into an adjustable rate mortgage with the first five years fixed. They might save a quarter of a percentage point in interest over the interest rate they could get on a 30-year fixed rate mortgage.

However, Crotz agreed with Lang that if you plan to be in your home for more than five years, it can make sense for many people to move out of an adjustable rate mortgage and lock into today's long-term mortgage rates.

Refinancing won't necessarily make sense for people who have small mortgages, Crotz said. That's because the potential amount that can be saved on monthly payments, for example on a loan of $50,000, isn't large enough to justify the closing costs. If you only save $35 a month, it will take a longer time to recover the closing costs, Crotz explained.

For customers whom Crotz describes as "debt users," the monthly reduction in payments that can be realized by refinancing can be substantial. She recently worked with a client who realized a monthly reduction in his total debt payments of $1,000. He combined first and second mortgages, credit card debt, automobile payments and a variety of other debt into one payment at the lower interest rates offered by a home mortgage.

"I try to really consult with people about what is the best for their personal situation and find out what product fits their needs," Crotz said.

Lang agreed with Crotz that homeowners who are close to refinancing their mortgage anyway should take a hard look at their overall credit picture.

"Some people get a little heavy in credit card debt," Lang said. "They should look at their total debt." People who are paying interest rates from 9 to 20 percent on thousands of dollars of credit card debt could roll that debt into a refinanced mortgage and save in two ways. The first is by paying lower interest rates, and the second comes from converting non-tax-deductible credit card debt into deductible debt on a home.

By law, mortgage lenders can't require borrowers to cleanup other kinds of debt at the time they refinance a mortgage, but Lang is more than ready to offer friendly advice on the matter.

"I'd clean it up. I'd just get rid of it," he said. "Cut up your extra credit cards and just keep one."


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