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The rush to refinance
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September 9, 1998: 2:42 p.m. ET
Mortgage refinancings are up almost 45 percent. Should you join the crowd?
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NEW YORK (CNNfn) - Mortgage refinancings in the U.S. jumped 44.5 percent on both a seasonally adjusted and unadjusted basis in the week ended Sept. 4, the Mortgage Bankers Association of America said Wednesday.
It's no wonder. Last week, mortgage rates hit five-year lows, with the 30-year-fixed rate dipping to 6.82 percent.
And if rates continue to head toward the 6.5-percent level, it would pave the way for another wave of homeowners that are potential mortgage refinancing candidates, said MBA chief economist David Lereah.
The spike this week was likely due to vacationers coming home and finally getting a chance to act on low interest rates, Lereah added.
"Rates have come down, but the last several weeks of our survey were for the end of August," he said. "with a lot of households on vacation. Everyone is back now and taking care of business."
So how do you know if you should take care of some "business" of your own? Many people are hesitant, because refinancing comes with a whole parcel of fees. In fact, the rule of thumb used to be don't refinance unless the current rate is two percentage points less than yours.
But the new trick, experts say, is to crunch the numbers and make sure you're coming out ahead, even with the fees.
"You need to figure out how long it will take to repay yourself the cost of refinancing," said Gary Altman, president of Capital Mortgage Services in Atlanta.
Say, for example you have a 30-year fixed rate mortgage at 7.75 percent. You might be able to refinance at 7.125 percent, plus the cost of one point (1 percentage point) and $2,000 in fees. Or, you could refinance at 7.25 with no points, but still have $2,000 in miscellaneous fees.
But suppose you could get a 7.5 percent deal, with no points and no fees -- which is basically known as zero-cost financing. You're still coming out ahead of your current 7.75 percent rate with no additional costs, so it makes sense to refinance, even if you only save a little bit every month.
Depending on how the numbers work out and how long you own your home, it may also be worth it to get today's best rate and pay the points and fees.
In other words, if fees cost $3,000 -- and it doesn't matter whether you pay cash or increase the loan -- and if your monthly payments decrease by $30, then you can divide $3,000 by $30 to see how long it will take you to break even. If you plan to stay in your house longer than this time period, then it's a good idea to refinance.
One thing that makes a difference is the size of the loan, said Altman. As a rule, the larger the loan amount, the easier it is to justify refinancing for a small interest rate difference.
Last year, experts were saying mortgage rates wouldn't go any lower. But now, according to mortgage firm Freddie Mac, there isn't much threatening the rosy U.S. mortgage lending picture.
What does this mean for you? Take your time, figure out if it makes sense for you to refinance, and then bargain a bit -- maybe rates will go lower still.
--from staff and wire reports
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