The Refinancing Dilemma: Should I Do It?
Date : 04/23/2010
Since the Federal Reserve ended its program of purchasing mortgage-backed securities at the end of March, mortgage rates have
ticked up. Average 30-year fixed rates were 5.21% for the week ending April 9, up from 5.05% about a month ago, according to
HSH Associates, a mortgage-data tracking firm. And if the economy keeps on current course, HSH expects to see conforming
30-year rates in the 5.75% to 6% range by end of 2010, give or take a little, says Keith Gumbinger, vice president at the firm.
Plenty of qualified homeowners have already taken advantage of the low rates and reduced their payments with a refinance. But
activity has moderated some.
“Refinancing has definitely slowed down over the last month or so,” says Tiffany Taylor, a certified mortgage planning specialist
with Platinum Funding Group, Inc. Irvine, Ca . “It seems that every time rates would drop below 5% we’d get a rash of
refinances,” she says, which slows down when they move back over 5%.
“There are still lots of people who can benefit from refinancing,” Taylor says.
A handful of factors must be weighed when deciding to refinance a mortgage. Among them: the cost to refinance, the monthly
payment savings, and how long you plan to be in the property. As long as you figure you can recoup your refinancing costs within
12 to 18 months, a refinance can be a sensible move:
Here are some refinancing options to consider:
Fixed rate
Borrowers with an adjustable-rate mortgage may be concerned that they won’t be able to afford their payments once their rate
resets – at a possibly higher rate. (The rates on these loans adjust on a specified schedule after an initial fixed period based on
movements in an interest rate index.)
In that case, they should consider refinancing into a fixed-rate loan, says Jack Guttentag, a professor of finance emeritus at the
Wharton School of the University of Pennsylvania.
The savings they’re enjoying now from the low ARM rate (which on average run a point below the 30-year fixed rate) may not
justify the risk of getting caught by a rate increase later. The value comes from the predictability of having a mortgage payment that
won’t reset.
Locking in a rate now is particularly a good idea for borrowers who had gotten an ARM with the intention of living in the home for,
say, five years, but because of real estate conditions, have to stay longer in the hope of a rebound in home values, says Tim
Galligan, sales manager and mortgage consultant with 1st Advantage Mortgage in Lombard, Ill.
ARM
Adjustable-rate mortgages “ have gotten kind of a black eye in the last few years. People assume any adjustable was a subprime
loan. That’s not the case,” says Galligan.
In fact, refinancing from a fixed-rate loan into an adjustable-rate loan in order to take advantage better rates in the short term
could be a good option – but only if you’re sure about how long you’re staying. If somebody has been in their home for five years
and had planned to stay there for just 10 years anyway, why pay 5% on a 30-year fixed when you can pay 4% on a five-year fixed,
Galligan says.
These days, Brown says, borrowers can get a seven-year ARM for 4%, and a five-year ARM in the high-3% range – both lower
than the market rate for a 30-year fixed conforming loan. “If you know you’re going to move in 10 years, you shouldn’t look at
refinancing into a 30-year fixed loan, because you can get a lower rate and have the safety of 30-year in a 10-year ARM,” says Brown.
Just keep in mind that your payment is going to change down the road to adjust to going market rates – and the probability is that
they’ll be higher. Though if you move in five years, you’re going to be in the market for a new mortgage anyway, and if rates tick
up, you’ll have to pay that higher rate. So you’ll be in the same position had you not decided to refinance, says Guttentag.
15-year
Another option for certain borrowers is to refinance from a 30-year into a 15-year fixed-rate loan, which could save tens of
thousands of dollars over life of the mortgage.
Taylor, who’s had success doing this with several clients recently, says this isn’t for homeowners who are struggling with their
monthly payments. “In this case, we’re not looking to save on the payment – we’re looking to save on the interest of the loan,” she
says.
Taylor's client, a couple, was paying $875 a month on a 30-year year loan at 5.75%. Their loan amount was about $144,000,
and she was able to refinance them into a 15-year fixed rate mortgage at a much lower rate of 4.25%. Their monthly payment
(principal and interest only) increased to $1,087. But with the significantly lower rate, Taylor shaved 10 years off their loan term.
And they’ll be saving more than $90,000 in interest costs over the life of the loan, while their closing costs (the actual cost of the
refinance) – which came to $1,387 – will be recouped in about eight months, says Taylor.
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