Refi-Mania, Is it Time to Refinance?

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Refinancing activity accounted for 52.1 percent of total mortgage applications last week, a big surge up from 45.5 percent the week before, according to the Mortgage Bankers Association of America's Sept. 9 report.

That's because Freddie Mac's average 6.77 percent fixed rate for 30-year mortgages fell the week ending September 10 to just a hair away from the record 6.74 percent level set in October, 1993 -- the best rate since Freddie Mac started recording rates in 1971.

Thank global economic turmoil for the good news on mortgage rates.

Nervous investors recently flocked to divest themselves of mutual funds, contributing to mass trading of U.S. company stocks for cash and safer U.S. Treasury securities. That drove up bond values and when bond values swell, yields fall and mortgage interest rates follow.

Worldwide market volatility is also forcing the Federal Reserve to rethink its recent strategy not to lower interest rates. The Fed hasn't changed interest rates since March of 1997.

"In the spring and early summer, the Federal Open Market Committee (the Fed's arm that changes short-term interest rates) was concerned that a rise in inflation was the primary threat to the continued expansion of the economy,'' Fed chairman Alan Greenspan said during a lecture Sept. 4 at the Haas School of Business at the University of California-Berkeley.

"By the time of the committee's August meeting, the risks had become balanced. The Committee will need to consider carefully the potential ramifications of ongoing developments," Greenspan said.

If the Fed moves to lower rates, that could easily push mortgage interest rates below the record and closer to the coveted 6 percent mark, a point at which benefits would be available even to those who refinanced as recently as a year ago.

A year ago rates were about 7.5 percent. A $250,000 financed at that rate costs $1,748 a month. The same loan at 6.5 percent costs $1,580 a month and a 6 percent note would come in at only $1,498 a month.

Deciding to refinance, however, isn't quite as simple as calculating the monthly savings.

"You can refinance to save money on interest charges, lower your monthly mortgage payment, exchange your adjustable mortgage for a fixed-rate loan, trade down to a shorter term mortgage or cash in on your home equity," says Earl Peattie, president of the Mortgage News Co. in Morro Bay, CA.

Whichever way you go, loan costs can eat into your monthly savings unless you stay in the home long enough for the savings to continue after they've paid for the financing costs.

Generally, if you take all the costs of refinancing (points, fees, settlement charges, application fees, appraisal fees, credit report fees, recording fees, title insurance, underwriting fees, all of them) and divide the total by your expected per-month savings. The answer is how many months it will take your savings to exceed your refinancing costs.

If, for example, you were going to save $200 a month and the loan cost you $3,000, you'd need to stay put 15 months to break even.

A legitimate "no cost" refinance shouldn't carry any points (each point is 1 percent of your financed amount), but many still charge origination fees and you can rarely avoid settlement costs, appraisal fees, credit report costs, recording fees and the like.

Just because you don't write a check, doesn't mean the loan isn't costing money. In many cases the fees are simply financed with your mortgage.

Also, don't forget to figure in the cost of any prepayment penalty -- it can be a whopper -- up to six months interest on 80 percent of the balance. Lenders have made it their business to tack on the penalties to protect earnings from refinance booms during recent years of relatively low rates.

Don't get caught up in mortgage marketing campaigns pushing refinanced mortgages. Each time you do, you may enjoy a reduced payment, but your loan becomes a new note extending for another 30 years.

If you find yourself refinancing frequently without reducing the term of the loan it may be time for another financial strategy.