When Frank and Kathleen Meeder saw interest rates dropping to new lows early this month, they acted fast. Working with a lending agent at Loyola Federal Savings and Loan Association, they refinanced, and switched from their three-year adjustable-rate mortgage at 9 5/8 percent (and with a 30-year term) to a 30-year, fixed-rate loan at 8 7/8 percent.
Thanks to their action, the Meeders are now paying about $175 less in principal and interest each month for their four-bedroom Colonial in Towson. They're also free from worries about shifting interest rates.
"Our feeling is that with the economy going up and down, it's good to lock into something that you feel is reasonable," said Mr. Meeder, a manager at C&P Telephone. "It's better to have a sure thing than to have to revisit your loan every three years."
The Meeders are far from alone. Ever since the Federal Reserve Board lowered its discount rate to 5 percent in mid-September, driving mortgage rates down to their lowest levels in at least four years, hordes of homeowners have poured into banks and other lending institutions to refinance.
Many lending institutions say that refinancing applications have increased substantially since 30-year fixed rates fell to about 8 1/2 percent, and three-year ARMS fell to about 7 percent. At Loyola Federal, such applications now make up about 35 percent of the total volume of applications -- a jump of at least 15 percentage points from earlier this year, according to Peggy Rhodes, vice president of the savings and loan. Ms. Rhodes noted that the current volume matches that of January and February, when interest rates also dipped.
Like the Meeders, many people are switching from ARMs to fixed-rate mortgages -- a decision that can make a lot of sense, lending agents say. "If you're planning to stay in your house for any length of time, an ARM right now isn't strategic, since it's so close to the fixed rate," said Gene Lugat, chairman of the Greater Baltimore Board of Realtors' Mortgage Finance Committee and vice president of PaineWebber Mortgage Finance Inc. "It's probably a good time to lock into a fixed rate."
Another popular option: switching from a 30-year to a 15-year loan. When Stephen and Sheila Rochfort of Parkville refinanced their 30-year ARM loan at 9 percent in mid-September, they exchanged it for a 15-year fixed-rate loan at 8 3/8 percent. Their monthly mortgage payments increased, to $1,197 from $995. But the peace of mind afforded by a fixed-rate mortgage, as well as the knowledge that they'll be paying off the loan sooner, compensates for the added pressure on their wallets.
"I always felt that if I could get to the point where I could convert to a 15-year mortgage, I should do that," said Mr. Rochfort, a project manager at Westinghouse Electronic Systems Group. "And rates got to a point where it became possible."
Although halving the term of your loan may increase your monthly payments, it's still a good idea if you can afford it, said Chip Reichhart, executive vice president of Maryland National Mortgage Corp. You'll be paying less interest and will build equity faster, he noted.
Another emerging trend is the tendency to diverge from the old "2-2-2" rule, which states that you should not refinance unless you've been in your home for two years, your interest rate is at least two points over the current rate, and you plan to remain in your house for at least two more years. Some lending agents, pointing out that settlement costs usually amount to 1 percent of the loan plus points, still subscribe to that theory.
But others say that it can be wise to refinance even if the interest rate differs only by 1 percent or 1.5 percent. That's particularly true if you have a large balance remaining on your loan, over $100,000, and you're planning to remain in your home for at least three years.
"In most cases where you see a drop in the rate of 1 percent to 2 percent, it will only take you three or four years to recover closing cost expenses]," said Mr. Reichhart. "If your loan balance is significant enough, it may make sense [to refinance]."
To determine whether refinancing is a good option for you, calculate how long it will take you to recover the closing costs accumulated by taking on the new loan, suggested Mr. Reichhart. First, add the costs of refinancing, which generally includes points and appraisal fees. Then calculate the difference between your projected monthly payments and your current payment. Divide the costs of refinancing by the monthly savings to determine the number of months it will take you to recover the costs of the loan.
If the number you arrive at is five or six years, and you only plan to be in your home for another two years, it might not be worth it.
Determining whether refinancing at a shorter term will put you ahead is a bit more complicated.