Jonathan Carter

To Refi, or Not to Refi…

Antsy Interest Rates Make it Tough to Know

 Over the past few weeks mortgage rates have inched higher while short-term interest rates have ebbed even lower. After hitting an all-time low in October of 5.98 percent, 30-year fixed mortgage rates have begun creeping upward again.

So what's a homeowner to do who has been considering refinancing their mortgage?

Rates are still low.
For many folks, it's a good time.

If you're looking at an adjustable rate loan (A.R.M.), now may be the time.
The Federal Reserve's decision to cut short-term interest rates by 1/2 a point on October 30 could lower one-year ARMs (currently at 4.25 percent) by several basis points. The rates the Fed controls---the discount and federal fund rates---affect short-term lending rates. (The discount rate is what the Fed charges banks that borrow money and the short-term lending rate is what banks charge each other to borrow money overnight.)

On the other hand, if you're looking at a long-term 30-year fixed mortgage, you won't see a direct impact from this reduction.

So, if you're considering a loan product with short-term interest fluctuations, chances are you'll see rates drop in correlation with Fed cuts. Loans fixed over longer terms probably won't change.

Other things to consider.

Change to a shorter life mortgage.
Refinancing's Golden Rule of waiting to refinance until you can lower your rate by at least 2 percentage points no longer applies. In fact many homeowners who refinanced only last year are revisiting the process all over again to reduce their rate by just a half or quarter percent, especially if it shortens the length of their loan.

Compare potential savings to the cost of the refi.

Typical costs on a $125,000 loan include:

• $450 - $725 in lender and broker administration costs

• $200 -$410 in application fees

• $50 - $350 in document preparation fees

• $375 - $475 for an appraisal

• $8.50 - $65 for a credit check

• $50 - $850 for attorney fees

Nearly all lenders require several months' worth of property taxes at the time of closing. This could amount to thousands of dollars and will add to costs.

"No-cost" refinancing is often available.
This process incorporates lender and broker fees into the mortgage itself, keeping your up front costs low.

For any refi, just remember:
The larger your loan, the more you'll save with each rate reduction.

• A 30-year, $300,000 loan at 7 percent interest, refinanced to a 6.5 percent loan will save you $100 a month and $35,000 in interest over the life of the loan.

• A jumbo 30-year, $450,000 loan at 7 percent interest, refinanced to 6.5 percent, will save $150 a month, and about $54,000 over the life of the loan.

It Takes Time.

Processing a refi in an ordinary market typically takes about a month. Homeowners often choose a 30-day "lock" on the mortgage interest rate they're offered, freezing the rate while everything is processed. This 30-day lock is usually free.

But in today's hopping market, closing a refi in 30 days is almost impossible. Experts are recommending at least a 45- or 60-day lock period. Be aware that this may cost you in the form of a slightly higher interest rate or an up-front percentage-based fee, or both.

• A 60-day lock could cost you 1/8 of a point more interest. On a $200,000 mortgage at 6.25 percent, you'd pay a total of $243,316 in interest over the loan's life. Locking in at 6.375, just 1/8 percent higher, you pay $249,186 in total interest. That's almost $6,000 more.

• However, the longer lock-in could also save you big-time. Lenders require a deposit (often 1 percent of the total loan amount) which is returned if you close on time. If you fail to close within 30 days after choosing a 30-day lock you lose your deposit. On a $200,000 loan, your $2,000 is gone.

Just remember the busy climate of the market and ask about the consequences of closing late before you decide.

Ask for help to sort it all out.

Your mortgage broker will help you assess whether you should refinance.
He or she will help you find the best rates, determine how much you'll save with a refi, help you compare your potential savings to the cost of the refi itself, and help you weave through the other intricacies of the refi process.