Shake Some Savings Out Of Your Mortgage
On Jan. 3, Deepa Bhat decided it was time for her and her husband, Ghanshyam, to refinance the $100,000-plus mortgage on their five-bedroom home. With interest rates falling, her lender was offering to cut their 30-year fixed-rate mortgage from 8.25% to 7.5%--with no closing costs. That lowered the Bhats' monthly payment by $130. "The amount is not that big, but savings is savings," says Deepa, 49, a homemaker in Holmdel, N.J.
The Bhats' decision was a good one, even before the Federal Reserve shocked the markets with a half-percentage-point rate cut. In a hotly competitive lending market, mortgage lenders didn't wait for Alan Greenspan & Co.--they cut rates in anticipation of the Fed's move. Mortgage rates are at their lowest point in nearly two years, and it looks as if they may continue to drift down.
So if you, too, are thinking about refinancing, it's not too late. Economists say rates on 30-year mortgages of $275,000 or less should stay close to or just below 7% this year. "Jumbo" mortgages--those exceeding $275,000--run about a half point higher, so they should hover around 7.5%. Moreover, bankers are eager to lend: Mortgage delinquencies are close to a 28-year low, and experts don't see credit standards tightening even as the economy slows.
In deciding whether to refinance, consider a few crucial facts. Know what you're paying, then figure out if rates have fallen far enough to make it worth your while. Economists used to say rates had to fall by 2 points--from, say, 9% to 7%--before refinancing made sense. No more. The longer you plan to stay in your house, the smaller the rate cut you'll need to justify a refi. Now that many lenders offer refinancing with no closing fees, borrowers such as Bhat are jumping in to shave off as little as 0.75 of a point.
Check out your potential savings with one of the many mortgage calculators available online. Try IndyMac Bank Home Lending (www.indymacmortgage.com), LoansDirect (www.loansdirect.com), and Mortgagebot.com, the top mortgage Web sites according to Waltham (Mass.) Internet consultant Gomez.com. A small number of consumers use sites like these to apply online for refinancing. Most, however, just check rates and costs, and then complete the process the old-fashioned way--in person.
If you do decide to refinance, press for the lowest closing costs, if not a no-cost plan. Remember, though, that your rate will be about 0.25 to 0.5 of a point higher under a no-cost plan. The advantage is that you avoid having to ante up several thousand dollars, which isn't tax deductible, says Barry Habib, managing director at Manhattan Mortgage, a New York residential mortgage broker.
Generally try to avoid paying "points," or prepaid interest. Each point is 1% of your loan amount, forked over up front or added to the loan, in exchange for a slight rate reduction. However, paying a point can be worth it if you intend to stay in the house for many years. Not only do the long-term savings from the lower rate add up, but you get a small income tax break: You can write off refinancing points over the life of your loan.
Your current lender may offer to swallow many closing costs because it has already done the legal paperwork and knows your payment record. But banks' eagerness to lend will vary, so don't lock yourself into the first offer you get.
FLOAT. Also consider what type of loan you want. A newer kind of adjustable-rate mortgage--the "float-down"--is gaining favor. Unlike traditional adjustable-rate mortgages, your rate is capped, so you're protected if interest rates go up. If rates fall within a certain period, your rate "floats" lower as well. Most lenders only allow the rate to drop once, and some charge a float-down fee that may be refunded at closing.
Finally, be careful about trying to outsmart the market. Even though experts are forecasting lower rates later in 2001, you might be better off cutting your payments now rather than gambling on another quarter-point drop. If rates fall significantly after you've refinanced, you can always do it again.