Time To Refinance?

With mortgage rates still at all-time lows, more and more people are choosing to refinance their homes.

The Early Show financial advisor Ray Martin gave some advice for making the most of this major investment and explains who should consider refinancing.

The interest rate for 30-year fixed mortgages is currently hovering around 6.5 percent and the rate for 15-year mortgages is about 6 percent. Martin says homeowners are clearly thrilled by these historically low numbers — banks report seeing 35 to 40 percent more loan applications than last year or, in some cases, even last month.

One J.P Morgan Chase vice president said in the Wall Street Journal that the volume of applications "is probably double what it was 45 or even 60 days ago." It looks as though this year will beat the 2001 milestone of $2 trillion in residential lending.

As the stock market has fallen, home values have risen. Real estate is hot and people are being told it's a good place to put their money right now. Recently, some have begun to wonder if the real estate bubble is bound to burst. Martin says no. Sure, home values may not continue to grow at phenomenal rates; they will slow down and may even soften in a few specific regions. However, homebuyers are not going to lose money by investing in a house. And, since value is up and rates are down, Martin says those with property should refinance now and forget about the possibility of a bubble.

On the other hand, Martin recommends against completely restructuring or cashing out on loans in case of an unexpected loss.

Although the time is good for refinancing, it doesn't make sense for everyone.

Martin says a goal has to be determined when deciding to refinance a mortgage. Do you want to simply reduce your monthly payment and increase monthly cash flow? Or, do you want to save money over the life of the loan?

If you fall in the first category, now is a great time to refinance. However, there are more issues to consider if you're in the second category. How much will you pay in closing costs? If you've refinanced before, have you recovered those costs? Will you be in your home long enough to recover the costs of refinancing? On average, you can expect to pay about $2,500 to refinance. So, depending on how much you'll save each month with a new rate and how long it will take you to recover the closing costs, it may or may not make sense to jump on the refinancing bandwagon. Basically, the savings from the lower rate must outweigh the closing costs.

But what about those "no-fee" refinancing options often advertised in banks or on TV? According to Martin, there's no such thing as a no-fee loan. You may not be paying closing costs out of pocket now but you better believe you are paying that money somehow — either wrapping the cost into the loan by borrowing more or paying a slightly higher interest rate.

Lots of homeowners refinanced mortgages last year when rates began to drop. Now they want to know if it makes sense to do so again. It can, depending on the situation. The larger your mortgage, the more money you save by refinancing.

That larger savings may outweigh closing costs. Martin gave as an example a mortgage amount to savings comparison.

Mortgage Amount...............Monthly Savings
$100,000...............................$50
$150,000...............................$75
$200,000...............................$100

For those considering refinancing for a second or third time ,there are ways to cut closing costs. This is called "streamlined refinancing." Martin says owners should use prior appraisal/plot plan if they refinanced less than two years ago. Simply ask to use the appraisal and plot plan from the prior closing, eliminating the associated costs of about $250 and $150 respectively.

Martin also recommends updating one's title insurance policy. If an owner updates the policy instead of writing a new one, he or she can save anywhere from $400 to over $1,000, depending on the value of the mortgage.

An owner should also use the same attorney and lender: They will pay smaller attorney fees because the background work is already done and avoid state mortgage taxes by using the same lender.

Martin say owners should also consider escrow payments. Often, lenders will pay .5 to 1.5 percent of the loan amount towards closing costs if you go with these payments for taxes and insurance.

Once owners decide to refinance, they may also want to consider switching from a 30-year fixed mortgage to a 15-year note. Banks are seeing a lot of people do this and Martin thinks it makes sense. Although the monthly payment is higher because you pay the loan off in less time, the interest is lower. Martin gives an example of this where a possible savings of over $68,000 in 15 years thanks to an interest rate that is 0.5 percent lower than that of a 30-year morthgage.

Mortgage.............Interest Over 15 Years........Balance In 15 Years

30-year fixed 6.5%..............$172,662......................$145,711
15-year fixed 6%.................$103,788......................$0

Anyone considering refinancing also needs to know that it's taking longer and longer to complete the process and close on the loan. The growing number of applications is clogging bank pipelines, pushing the average closing time from 30 days to 60 days or more. Rates can change fairly quickly, which means a homeowner might miss the rate he originally thought he was going to get when refinancing. As protection, it's traditional to "lock in" a rate for 30 days. Consider locking in a rate for 60 days. This costs more, but it's worth it.