Home Sweet Deal: Is It Time To Refinance?

For the second time this year, sinking mortgage rates have homeowners racing to refinance. As usual, most of them are holders of adjustable-rate loans attracted by the siren lure of fixed rates, now flirting with 9%. But the low-rate, low-inflation climate may make this a good time for people with conventional fixed mortgages to make a move, too.

Say you're paying 11% on a $150,000 loan. Refinance to a 30-year fixed at 9%, and you'll save about $220 a month on your payments. If you pay two points ($3,000) plus $3,000 in other closing fees, you'll recoup your costs after 27 months. If you don't have $6,000 lying around, consider a no-point mortgage at a slightly higher rate. A 9.5% no-point would save $167 a month and recover closing costs in 18 months.

What if you think you'll move to a bigger house in the next two years or so? Convert that same mortgage to a one-year adjustable loan with an initial rate of 7%, and you'll slice $430 a month off your payments during the first year. Assuming the same closing costs, it will take just over a year to begin seeing a real savings.

Even if interest rates skyrocket, an ARM will be cheaper than a fixed-rate loan for three to five years, says Paul Havemann of HSH Associates, a Butler (N. J.) mortgage-information service. Most ARMs can rise no more than 2% per annual adjustment, so it would be two years before your payments hit their present 11% size. And unless inflation suddenly takes off, it's unlikely that initial ARM rates will rise the 2% maximum next year.

For those who plan to stay put, refinancing offers an almost painless way to pay off your mortgage twice as fast. Turn your 30-year loan into a 15-year fixed-rate mortgage at the going rate, 8.8%, and your payments will go up by $ 75 a month -- but you'll own your house in half the time. A lesser-known product is the "two-step" mortgage. The initial rate is about a half-point below 30-year fixed rates, and it's adjustable once, after five or seven years. This loan makes sense if you're paying a high fixed rate now and plan to sell within five years but are nervous about an ARM.

EQUITY CHECK. You can't refinance unless you own at least 20% equity in your home. So it may pay to get a new appraisal before checking out lenders. If you bought when real estate prices were at their peak, you could have less equity today than when you got your original mortgage.

How long will the window of opportunity stay open? Only as long as economic data continue to send mixed signals about the recovery. "As soon as we get two or three months of positive feedback," says Havemann, "rates will shoot right back up again."