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As Rates Fall, Is It Time to Refinance?

Homeowners have to pay attention to special circumstances because of the real estate slump.

After the real estate industry -- and its related securities -- almost deep-sixed Wall Street, it's hard to imagine there would be a silver lining: A five-week decline in 30-year fixed-rate mortgages has spurred a surge in refinancing, according to the

Mortgage Bankers Association


Refinancing has more than doubled since August, according to the trade group. Does refinancing make sense given current economic conditions? For some, it does. Swapping an adjustable-rate mortgage, or ARM, for a fixed rate, or FRM, is often a smart move -- especially now, when interest rates are relatively low. But for homeowners already holding FRMs, deciding whether to refinance depends on how much can be saved.

The first step is to make sure you're not "upside down" in your mortgage, that is, you don't owe more than your house is worth. In some parts of the country, slumping prices have made refinancing difficult, or impossible, because homeowners who bought at the peak of the market owe more than the current assessed value.

Next, check the numbers. The key is to make sure the amount you'd save on monthly mortgage payments would outweigh the amount you spend on closing costs. To see how a new mortgage at today's rates would compare with your existing mortgage, take a look at the

Refinance Interest Savings calculator

from Just enter the details of your current and future mortgages along with the cost of property taxes and homeowner's insurance.

Let's walk through a sample refinancing calculation: Say you bought your house 10 years ago with a $200,000 30-year FRM at an interest rate of 8%. You currently pay $3,000 a year in property taxes and $900 a year in homeowner's insurance, and your home is worth $250,000, based on your lender's assessment or a price comparison based on similar homes in your area that have been recently sold. The remaining balance on your mortgage (as indicated by the calculator) is $175,449, so you aren't upside down. If your lender offers a 15-year FRM at the current rate of 5.35% with $4,000 in closing costs, you could end up saving just under $48 on your monthly mortgage payment. But along with the lower interest rate, you've also cut your loan period by five years, which will save you $96,672 in interest payments over the life of your new loan.

It is a good idea for the term of your new loan to match (or be under) the remaining years on your existing loan. If you refinance instead with a 30-year loan, your monthly payments would be much lower than on the 15-year loan, but you would end up paying a lot more in interest because of the longer payout period. What's more, by shortening the time frame of your loan you'll build up equity in your home quicker. After just five years with the new 15-year loan, you'll have about $22,000 more in home equity than after five more years with your existing loan.

You should also consider how long you plan to stay in your existing home: It's generally not a good idea to refinance unless you'll stay long enough to break even on closing costs. The report from the Refinance Interest Savings calculator provides details of savings as well as the estimated break-even point. In the above example, it would take seven years for the $48 monthly savings to pay back the $4,000 in "refi" closing costs. If you think you'll move before then, you may want to think twice about refinancing.

Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.