"If she jumped off a bridge, would you follow?"
That was my mother's standard line during my teen-age years. Unfortunately the question still is applicable today. Then the question was whether or not I could wear blue eye shadow; these days the fashion is to refinance your mortgage.
Should you follow the crowd?
With the 30-year fixed mortgage rate down to 7%, from as high as 8.66% last year, you can't help but consider it. And many people are. A
recent story by
offers a great visual of how the refinance market is rocketing. (Big note: Don't consider refinancing because you're looking to help out your 2000 tax return. Any changes will be reflected in the 2001 return.)
The old rule used to be that you should consider refinancing only if the going interest rate is around 2% less than your current rate. "Well, throw that out the window," says Keith Gumbinger, vice president of
, an independent publisher of mortgage and consumer loan information, in Butler, N.J. "If you have a 8.25%, are you going to wait around for a 6.25%?"
I hope not, because you'll be waiting a long time. We haven't seen that rate in more than 30 years, says Gumbinger. In addition, that rule was created when the only available mortgage was a 30-year fixed loan, averaging $70,000. So you needed big interest swings to make a difference.
But, Mom, I Want To Refinance!
Here are three good guidelines to help you decide if refinancing is worth it.
- "If you have a fixed interest rate or 8% of higher, you definitely need to consider refinancing," says Jay Farner, VP of sales at
Quicken Loans, a division of Quicken.com.
Consider refinancing if you have anything other than a fixed-rate mortgage. You may have an adjustable-rate mortgage, (a.k.a. an ARM) meaning the interest rate changes periodically, usually in relation to an index, so your payments may go up or down accordingly. "About 98% of people with ARMs wind up refinancing now," says Farner.
Or you may have purchased a balloon loan, usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining amount of the principal at a specific time, according to
LendingTree.com. With the rates so low, there may not be a need to lock into that kind of commitment.
If you have debt, like from a credit card or personal loan, refinancing could help you consolidate your bills at a lower interest rate.
If you fall into any of these categories, then determine how long you plan on staying in that mortgage, says Gumbinger. No one expects you to stay for the full 30 years these days, but if you're planning on selling in a year or two, it might not be worth it to refinance. "If you sell in two years but it takes you five years to recover the refinancing costs, it doesn't make much sense," says Brenda Schafer, senior tax research coordinator at
in Kansas City, Mo. The longer you're in the home, the more likely that a refinancing will save you some money.
Fortunately, the Web offers some good calculators that can help you figure out how long it will take you to recoup these extra costs (it's called your break-even point). More important, they will offer you a ballpark of how much your monthly payment will change.
Quicken Loans has a
refinance calculator that can give you an idea of how much lower your monthly payment will be and how much you will save in the process. If you know your total closing costs, you'll get a better estimate; otherwise the site will approximate those costs for you.
HSH has a great
calculator, too, (although you can only use it with Netscape at this time). It offers an additional feature: an analysis of the total interest you'll pay and save over the life of the loan. (Warning: scary number.)
Of course there are loads of others out there, so let me
know if you have a favorite.
Let's say that based on the calculators, it appears that you can save some money by refinancing, assuming that's your goal. But what if you don't have the excess cash to pay those dreaded closing costs? (These costs can include a loan origination fee, points, appraisal fees, title search and insurance, survey fee, taxes, deed recording fee and credit report charge, to name a few. No surprise, they can run as high as 6% of the total loan.) Should you just nip the whole process in the bud?
Fortunately, you can roll those costs into your loan payments. That's called a cashless refinance. Sure, your payments may be a bit higher than if you fronted the closing costs, but even if you still save $60 a month, it's worth it, says Gumbinger. About 95% of Quicken Loans' refinancings are cashless, says Farner.
But consider this: When you refinance your mortgage, you will actually get a month off from making a payment. So you can apply the money you would've sent to your old mortgage company that month to your closing costs.
How Do You Do This?
The next step is to educate yourself. First, pull out your mortgage documents and check the interest rate. Make sure it's as high as you think it is.
Then start surfing. The sites we mentioned above have loads of basic information to help you get acquainted with the mortgage lingo.
Next you need to start shopping around for the best rates. Your first move should be a call your existing lender. If you're a good client, they won't want to see you go, so they may offer you a respectable refinancing rate. In addition, your lender could propose a "loan modification." This basically is a new interest rate on your existing mortgage. It cuts to the chase and cuts back on the headaches.
But before you sign a thing, call local banks and lenders and find out what they are offering. Check out reputable sites like Quicken Loans, HSH, LendingTree,
Wells Fargo. You may have to input personal information, so make sure you know who is getting it.
If you are uncomfortable inputting your mortgage information on the Web, Quicken Loans offers a toll-free number that will put you in touch with a loan consultant, says Tim Dennis, the designer of the Quicken Loans Web site. (Note: These loan consultants get paid based on customer satisfaction.)
Either way, ask questions. Ask about all your different options. Maybe a 15-year mortgage is a better way for you to go. Ask about the paperwork process. Hopefully, your refinancing lender will take care of it all for you. You don't want to be calling your old mortgage company trying to gather documents.
So, just because everyone else is doing it, should you?
Probably. (Sorry, Mom.)
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