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Personal Finance > Your Home
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Take advantage of low rates
graphic November 6, 2001: 7:52 a.m. ET

Ways to beef up your bottom line during the economic slowdown.
By Sarah Max
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  • Ask the Expert: Is now the time to buy a house? - Nov. 5, 2001
  • Fixed mortgage rates decline - Nov. 1, 2001
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  • Tool: Refinancing calculator
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    NEW YORK (CNNmoney) - A slowing economy isn't all bad news. If you own a home, you can take advantage of falling interest rates and save bundles on your monthly mortgage payments or cash out some of your equity by refinancing.

    After peaking at 8.8 percent in May 2000, 30-year fixed-rate loans have steadily fallen and now average 6.7 percent, according to HSH Associates.

    Contrary to popular belief, mortgage rates do not rise and fall on Alan Greenspan's rate cuts. In fact, housing rates typically reflect changes in the economy long before the Federal Reserve begins trimming short-term rates.

    "Mortgage rates come down when fixed-income investors think the economy is slowing, not because the Fed cuts rates," said Keith Gumbinger, a vice president for HSH Associates.

    Indeed, mortgage rates fell 1.5 percentage points between May 2000 and January 2001 even as the Fed held rates.

    "If the Fed's cuts succeed in stimulating the economy, then mortgage rates are actually likely to rise," Gumbinger said.

      graphic FACTOID  
        Contrary to popular belief, mortgage rates do not rise and fall on Alan Greenspan's rate cuts.
       
    According to the old rules for refinancing, it wasn't worth your while unless you could lower your rate by 2 percentage points.  Now that the process is easier and cheaper than ever, that's no longer the case. "The cost of refinancing is quite [a bit] lower than it was five or 10 years ago," said Greg McBride, a financial analyst at Bankrate.com. "Anyone who has taken out a mortgage in the past few years should look into refinancing."

    To determine whether or not to refinance, you'll want to calculate what you could save each month by refinancing and weigh those savings against your closing costs, which can add up to a couple thousand dollars. If you plan to stay in your house longer than it takes to recoup the costs of refinancing, then you should consider giving your mortgage a makeover.

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    The process is almost always easier and cheaper if you go through your current lender. First research competitive rates in your region and then call your lender to see if it will match those offers. Not only can you avoid having to do a lot of extra paperwork, you may also be able to save money on certain closing fees, such as appraisal fees.

    Some lenders are so eager to keep your business that they may even lower your rate for free. For example, Elizabeth and Tony Miller bought a four-bedroom house in Petaluma, California in July 2000 and are now refinancing - for free - for the second time this year. When all is said and done, they will save $270 a month on their $348,000 loan.


    Refinancing calculator
    "You could go to almost any lender and for no fees find yourself with a decent rate," Gumbinger said.

    No-cost refinancing, as it is called, saves on out-of-pocket costs, but typically adds about 5/8 of a percentage point onto the average rate for your market. If you only plan to stay in your house for a few years, this might be the best option since you start saving immediately. If you plan to stick around for a while, however, you might want to pay those costs and go for a better rate.

    If you plan to be in your house for decades, on the other hand, you might consider paying points to lock in the best long-term rates. Points, which cost one-half of a percent to 1 percent of the loan and are paid up front, let you buy a better interest rate.  "If you pay points up front, it's harder to get your money back," said Gumbinger. "When rates are high, borrowers have to pay points to trim rates any way they can, but with rates so low there is really no need to pay those points."

    Cashing out

    With investment portfolios depressed and credit card debt at an all-time high, many homeowners also are opting for a "cash out" refinancing.

    This process allows you to refinance for more money than you owe and use the difference to pay off high-interest debt or meet big-ticket expenses, such as college tuition.

    "This is very popular right now because it lets you draw some money out of your home and improve cash flow," said Gumbinger. "If you do this, resist the temptation to draw too much equity out of your home."

    To be sure, if the housing market suffers you risk owing more than your house is worth.   graphic

      RELATED STORIES

    Ask the Expert: Is now the time to buy a house? - Nov. 5, 2001

    Fixed mortgage rates decline - Nov. 1, 2001

      RELATED LINKS

    Tool: Refinancing calculator





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