A mortgage refinancing boom is on. The reason is obvious: Interest rates on 30-year fixed-rate mortgages have fallen to an 18-year low of around 8.25 percent, compared to 10 percent as recently as last July.
An estimated 1.5 million homeowners refinanced $160 billion in 1991. The traffic continues hot and heavy in early 1992, creating a fast-growing backlog of applications. About half the new mortgage issues of the past 12 months have been refinanced mortgages, and, at many institutions, it's lately as much as 80 percent. The refinancing business at most lenders is up sixfold.
"We're saving $485 a month by refinancing, which provides us with some extra spending money that we're using to do some home improvements," said Laura Radcliffe, a homeowner in Wheaton, Ill., who recently refinanced her mortgage.
A longtime rule of thumb is that there should be a differential of around 2 percent between your old rate and the new one in order to justify refinancing. Another consideration is that it's best if you plan to spend three or more years in the home.
"Most refinancers are looking for long-term fixed-rate mortgages these days, not adjustable-rate mortgages," said Tara Little, an executive with the real estate division of the American Bankers Institute in Washington. "Be sure to take into consideration whether your new home appraisal will be lower or higher than before."
Consider the savings. If you refinance a 30-year fixed-rate $150,000 mortgage from 10.5 percent to 8.5 percent, your monthly payment falls from $1,372 to $1,153. That's a savings of $219 a month.
Expect to pay 2 percent to 5 percent of your loan amount in refinancing costs. Three percent in the above case would be $4,500. The amount varies.
Included in refinancing costs are additional interest charges known as "points," credit application fees, appraisal and title report fees, inspection fees, mortgage insurance, survey and documentation preparation fees.
If you're considering refinancing, it's time to get your financial records in order and hunt for the best terms. You'll need records such as tax returns, pay stubs, account statements, debt records, title policy, homeowner's insurance policy and homeowner's survey.
"The qualifications which the borrower must meet are basically the same as required for the original mortgage," said Mark Riedy, president of the National Council of Community Bankers in Washington.
"Try to work out the refinancing first with your existing lender, since it doesn't want to lose your business, and this may give you bargaining power to make sure you're comfortable with all portions of the loan terms."
The backup in paperwork and appraisals is taking its toll at many institutions, so realize the effect this glut is having upon the completion of refinancings.
"We compare the current refinancing situation to rush-hour traffic," said Robert Holzer, a top executive with NBD Mortgage. "Sixty days is the typical time frame for completing a refinancing, but in this heavy rush-hour activity, some will undoubtedly be stretched out a bit."