Times change. The rule of thumb for refinancing a home mortgage used to be that you should end up paying at least 2 percent less interest on the loan and that you intend to stay in your home at least five years.
These days, with so many mortgage options available, that isn't necessarily so. You have to run the numbers to see how much you'll save in monthly payments and how long it will take to work off the cost of refinancing.
With about 70 percent of the nation's overall mortgage activity in refinancings, many of these borrowers obtained existing loans as recently as a year ago when rates were more than 9 percent. Refinancing a loan closer to 8 percent makes sense in many cases.
"What's changed is the amount of points [upfront charges, each equal to 1 percent of the loan] to refinance, which in many cases is very minimal and therefore reduces the time needed to recover the refinancing cost," said Martin Regalia, chief economist for the 2,100-institution Savings & Community Bankers of America.
"We're also seeing more lenders refinance with existing customers so as not to lose them, and this makes the entire process a lot easier," he said.
It doesn't take much to throw a scare into rate-watchers waiting out the best terms.
"Whenever there's a slight blip upward in mortgage rates, we see an acceleration in refinancing applications from folks who'd been waiting for rates to decline," said Kenneth Wohst, senior vice president in residential mortgages for New York's Chemical Bank. "They're worried that the last train has pulled out of the station."
Robert Holzer, president of NBD Mortgage Co. of Illinois, says current processing time for refinancings at his institution has stretched to 50 days. He urges applicants to be patient, to bring in all documentation when they apply and to accommodate scheduling requirements of busy home appraisers.
Know the costs. Refinancing on an NBD "no-points" loan is usually about $1,000, including credit check and appraisal, title charges and document preparation. (One to three points are also common refinancing choices. In some states, there's also a state mortgage tax.)
So, on a $150,000 mortgage, refinancing from the 9 percent of a year ago to 8.25 percent saves the borrower $80 a month. That translates to $960 a year. It would therefore take little over a year to recoup the $1,000 refinancing cost, Mr. Holzer said.
"The borrower has two options,either to float a rate that can go up or down, or lock a loan for a set period of 60 days," Mr. Holzer said. "Some consumers try to change a locked rate these days, and it can't be done."
Many borrowers are choosing 15-year loans, which may raise their monthly payment but save money in the long run by cutting the mortgage length.
There are other considerations. "The consumer who bought a home in some regions the last several years must enter refinancing with the understanding that his property may have depreciated slightly in value," cautioned Robert Andwood,managing director of BayBanks Mortgage Corp. in Westwood, Mass., and member of the American Bankers Association's housing and real estate finance committee. "A lot of people who find themselves in that situation reduce their mortgage balance by withdrawing money from their savings account to take advantage of the reduced interest rates and lower monthly payments."
Understand tax consequences. "While points on the original mortgage used to acquire a residence are deductible, points on a refinancing are not," said Robert Greisman, tax partner with Grant Thornton.