It May Be Time to Refinance, If You Play It Smart

This is a revised version, updated Jan. 22, of an article initially published on Jan. 14.

Mortgage refinancing is rising in popularity again -- and in light of today's emergency 0.75 percentage-point interest-rate cut by the Federal Reserve, it may look like an even better move.

With the refinance share of mortgage activity last week increasing to 62.7% of total applications from 57.7% the previous week, as the Mortgage Bankers Association announced Wednesday, it's clear that a lot of people have already jumped on board.

The average contract interest rate for 30-year fixed-rate mortgages decreased in the week ending Jan. 11 to 5.62% from 5.73%, while the 15-year fixed-rate mortgages decreased to 5.07% from 5.21%, says the MBA.

"Given the current trends in the housing market and the economy in general, it would not be surprising to see mortgage rates moving lower through out 2008," says Steve Habetz, president of Threshold Mortgage in Westport, Conn.

He suggests that if one needs to refinance, now is a good time to do so: "Rates tend to move down slowly and up with a vengeance."

"While there's a chance rates could drop further, there is more room for them to go up," agrees Sue Baxter, a senior loan officer with IndyMac Bank in Stamford, Conn. For those considering a refinance, "waiting for a 0.125% rate change or better is a gamble," she says. "Some banks offer a float-down option which may enable a borrower to take advantage of a rate drop."

There are a couple other factors homeowners may want to keep in mind when considering a refinance.

Consider the Costs

Although the interest rate on the refinance might be lower than your current loan, taking out any loan will still cost you money. For example, you should factor in closing costs to determine how long it might take you to break even on the change, say experts. Also, the tax deductibility of the refinance might differ from your existing loan.

"Most homeowners know that the points they pay to obtain a mortgage are tax deductible. When you refinance, however, any points you pay must be amortized over the life of the loan. In other words, you can't take the full deduction for the points in one year, as you can do when you buy a house," says Lynnette Khalfani-Cox, The Money Coach and author of Your First Home: The Smart Way to Get It and Keep It.

"Even if you hear lenders talk about a so-called 'no cost' refinancing, don't believe it," she says. "A lender might not have an application fee, or charge you points to refinance, but those costs and others associated with refinancing are essentially priced into a loan with a higher interest rate. A refinancing entails paying off your old loan and replacing it with a new one, and banks aren't in the business of making loans free of charge."

Don't Get Greedy

In the third quarter of 2007, 87% of loans owned by Freddie MacFRE that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review. The revised share for the second quarter of 2007 was 84%.