Rate Opportunity

November 5, 2001: 8:37 p.m. ET

With mortgage rates at three-year lows, should you refinance?
By Judy Feldman

NEW YORK (CNNmoney) - The Fed has cut interest rates nine times since January, and experts expect it to do so again at the next meeting of the Federal Open Market Committee on Nov. 6. The most recent cut, on Oct. 2, brought overnight bank lending rates to their lowest levels in nearly 40 years. But, generally speaking, changes to the Federal funds rate doesn't have an immediate impact on mortgage rates, which tend to move in anticipation of Fed action and other economic trends. Still, rate cuts often prime homeowners to consider refinancing. And with this year's downward trend in mortgage rates, there may be plenty of people who could benefit. You might be one of them if your situation fits one of the following scenarios:

You're paying a high rate or want security
The most obvious refinance candidates are homeowners paying more than 7.75 percent -- which could be the case if you bought between January and December 2000 or missed the 1998 refinancing boom. For the week ending November 3, the average 30-year fixed rate was 6.66 percent, down from 7.90 percent a year earlier.



	When you find the rate you like, lock it in. Mortgage rates are notoriously fickle.



	Keith Gumbinger Vice President, mortgage tracker HSH Associates

But if you have an adjustable-rate mortgage (ARM), the decision is "no longer a no-brainer," says Keith Gumbinger, vice president of mortgage tracker HSH Associates. Roughly one third of borrowers took out an adjustable-rate mortgage in 2000, when fixed rates were high for much of the year. In March 2001, it might have made sense for you to refinance if you had a one-year ARM since it adjusted upward from 6.66 percent to 7.85 percent. But for the week ending November 3, a one-year ARM adjusted downward from 7.23 percent to 5.77 percent, Gumbinger says. Refinancing to a fixed-rate mortgage is a worse deal in the short -run, but some people might want to lock-in a reasonable fixed rate.

You have a jumbo loan
Rates on jumbo mortgages run about three-eighths of a percent higher than normal rates, so it can pay to refinance once your outstanding debt is near the cutoff for a so-called conforming loan. The current limit for conforming mortgages is $275,000.

You want to be out of debt faster

Refinancing isn't always about cutting your rate. Low-rate periods also create an opportunity for borrowers to shorten their loan terms. Say last November you took out a $150,000 30-year fixed-rate mortgage at 7.9 percent and pay $1,090 a month. If you refinance to a 15-year fixed mortgage at the going rate of 6.16 percent, you'd owe another $178 each month -- but over the life of your loan you would save $162,976 in interest. You're paying for private mortgage insurance (PMI)
If the equity in your home is less than 20 percent of the original purchase price, private mortgage insurance is required. But even if you've crossed that threshold, you can't cancel private mortgage insurance unless your payment history is blemish-free and in many instances you've been in your home at least two years. Refinancing is a way to sidestep those hurdles by working out a brand-new deal: A new mortgage could save you between $35 to $150 a month in insurance payments, Gumbinger says.

You have other high-rate debt
Mortgage debt carries some of the lowest rates available, and the interest is tax deductible. So if you have untapped equity in your home, you may want to opt for a cash-out refi -- a larger mortgage than you currently have -- and pay off higher rate loans. If you want to get a better mortgage, use our refinancing calculator to see how much you'll save -- and how long you'll need to stay in your home to recoup your refinancing costs. You'll find a list of lenders with the best rates at HSH Associates. Check first with your current lender, who may be willing to cut your rate faster and with less paperwork. Remember, too, the window for optimal refinancing is not always open. Gumbinger anticipates that refinancing may become a less attractive option two months to a year from now if the economy picks up steam and rates start to climb. His advice? "When you find the rate you like, lock it in. Mortgage rates are notoriously fickle."