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Personal Finance > Your Home
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Should you refinance?
graphic December 11, 2001: 4:22 p.m. ET

You may have missed rock bottom, but refinancing could still be wise.
By Annelena Lobb and Bettina Teodoro
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NEW YORK (CNN/Money) - There's not much to cheer about on the financial front this year. The economy is still knee-deep in recession and Wall Street is giving investors a run for their money.

But a few silver linings remain. Interest rates are among their lowest in 40 years, thanks to the Federal Reserve's rate-cutting spree -- 11 so far this year. In efforts to boost a lagging economy, Fed Chairman Alan Greenspan cut short-term interest rates by a quarter-point on Tuesday, to 1.75 percent.

Long-term mortgage loans aren't directly tied to short-term rate fluctuations, of course. But they do set the tone for the interest rate environment overall. As such, mortgage rates have remained near historic lows for much of the year. This week, 30-year fixed rate mortgages with no points are hovering at around 7.14 percent.

If you haven't done so already, insiders say it's still a good time to get in on the refinancing boom.

"You may have missed the absolute bottom, but for a lot of people, 7 percent still looks great," said Doug Duncan, chief economist at the Mortgage Bankers Association of America.

Take another look at your mortgage

In most cases, those with adjustable rate mortgages (ARMs) should be first in the refinancing line, experts say. ARMs boast the lowest rates but offer little security. Your rate, and monthly payment, could soar in the years to come if rates begin to climb. 

More importantly, experts say, it's unlikely 30-year fixed rates will remain where they are for long.

"Think about the relative merit of variable rates versus fixed-rate credit," said Fritz Elmendorf, vice-president of the Consumer Bankers Association. "Locking in a fixed rate now gives you a great deal of comfort. Even though the lowest rate might be a variable rate, those could start to climb again next year."

According to the Mortgage Bankers Association of America (MBAA), the total volume this year of mortgage originations and refinancing will likely surpass $2 trillion. In 1998, the previous record year, total volume reached $1.5 trillion. "It's almost certain that refinances alone will comfortably surpass $1 trillion," said Doug Duncan, chief economist at the MBAA.

First of all, consider refinancing if your interest rate is above the market rate, said Frank Nothaft, chief economist at Freddie Mac. "You can end up saving each month if you get a lower rate," Nothaft said. "Many families are looking not only to reduce the rate, but get a more attractive term on their mortgage, changing from a 30- to a 15-year product."

You may also want to consider a refinancing if you are well into the term of your mortgage, and want to reduce the number of years you'll spend paying it. With the drop in interest rates, you may be able to keep the same monthly payments, but reduce the amount of time you're paying that bill.

And finally, it may be time to head to the bank if you have PMI, or private mortgage insurance, and you have enough equity in your home to get rid of it. Homebuyers typically have to pay PMI if they make a down-payment of less than 20 percent of the home's sale price. But Nothaft said the combination of monthly payments and home appreciation may mean more families have reached the 20 percent equity "quota."

While they're refinancing, they can also reap the benefits of a reduced interest rate and possibly a reduced mortgage term.

"Over the last couple of years, we've seen many markets with strong home value appreciation. They're up at a considerable pace in many markets across the country, particularly from New England all the way down to Washington, D.C.," Nothaft said. "Home values are up in D.C., for example, by over 10 percent over the past year. That means families have built up home equity."

A few considerations

However, homeowners must still determine whether refinancing is right for them. In the long run, the savings must exceed the costs of refinancing, which generally range from 2 to 4 percent of the outstanding loan.

Be wary of lenders that offer "no-cash refis." The cost of refinancing is typically woven into the new mortgage, showing up either in the principal or interest rate.

The MBAA's Duncan also mentioned the difference in tax terms when it comes to deducting points. (A point equals 1 percent of a mortgage loan, and is charged by lenders to make a profit. Borrowers can pay points up front in exchange for a reduced interest rate on the mortgage.)

When you buy, you deduct any points you pay in the year you take out the mortgage. In a refinance, those points will be spread out over the life of the loan. Homeowners who wish to refinance to reduce their income will only be able to deduct a portion of the points paid.

If you're planning to move in the near future, it may not be worthwhile to refinance. Duncan said homeowners can calculate how many months they would have to stay in the home to make refinancing worthwhile -- the breakeven point -- by dividing the up-front costs of refinancing by the monthly savings.

You should also check whether your mortgage is subject to a prepayment penalty, which some people accept in exchange for a lower rate. Check with your lender to review all of your mortgage terms before you leap into something new, Duncan said. graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.

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