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Does it still make sense to refi?
The Fed held steady on interest rates today. Are plunging mortgage rates a thing of the past?
December 10, 2002: 4:24 PM EST
By Annelena Lobb, CNN/Money Staff Writer

NEW YORK (CNN/Money) - As mortgage rates edge higher and short-term interest rates fall further still, homeowners looking to refinance their mortgage loans may be wondering what to do next.

During the past month, mortgage rates had started to record an upward trend after a drop to rock-bottom lows. Today, the 30-year fixed mortgage rate stands at 6.19 percent, up from the Oct. 11th low of 5.98 percent, said Frank Nothaft, chief economist at Freddie Mac.

"Rates are still [near] historic lows," Nothaft said. "And plenty of people could still benefit from a refi."

Those weighing the benefit of an adjustable rate loan may wonder whether the Fed's move to leave short-term interest rates at 1.25 percent will affect them. But one-year ARMs -- currently at 4.21 percent -- should hold steady as well.

That's because the rates controlled by the Fed -- the discount and federal funds rate -- affect short-term lending rates, the former being the rate the Fed charges banks that borrow money and the latter being the rate that banks charge each other to borrow money overnight.

As such, loan products that have short-term interest fluctuations, like adjustable-rate loans, are more likely to see their rates drop in tandem with Fed cuts. Loan products with interest rates that remain fixed over longer terms -- like the 15- and 30-year fixed rates -- are less likely to change.

When it's time to take the plunge

These days, it seems the old Golden Rule of refinancing -- that is, waiting to refinance until you can lower your rate by at least 2 percentage points -- no longer applies. Many homeowners who refinanced just last year are coming back for a second round if it pushes their rates down by just a half or a quarter percent -- especially if it means they can shorten the length of their loan.

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To assess whether a refi makes sense for you, find out how competitive rates are in your area, then ask lenders offering the most competitive rates for an estimate of how much you'd save with a refi. Your last step should be to compare potential savings to the cost of the refi.

On a $125,000 loan, lender and broker fees commonly can range between $45 and $725 in administrative fees, $100 and $410 in application fees, and $50 to $350 in document preparation fees. An appraisal might cost between $175 to $375, a credit check from $8.50 to $65, and attorney fees from $50 to $850, according to Most lenders also require several months' worth of property taxes at the closing table, which alone can amount to thousands of dollars.

In many cases, you can get a "no-cost" refinancing, which incorporates lender and broker fees into the mortgage over time so your up-front costs are low. If you don't think you'll be in the house for very long, or you've recently refinanced with closing costs, you might take this option.

For any refi, though, remember: The larger your loan, the more you'll pocket with each rate drop.

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For example, if you have a 30-year loan for $300,000 and a 7 percent interest rate, a refi to a 6.5 percent loan will save you $100 a month and $35,000 in interest over the life of the loan. By comparison, someone with a jumbo 30-year loan for $450,000 and a 7 percent interest rate would save $150 a month and about $54,000 over the life of the loan with a refi to a 6.5 percent loan.

Don't forget to show your original lender the best offer you have, if it didn't actually come from them. Banks are eager to keep your business. Unless your credit is shabby, they're likely to match the going rate in order to keep you aboard. Sticking with your lender is good for you, too: all your mortgage information is on file, which often streamlines the process and increases your odds of closing on time.

Refinancing today

Keep in mind, too, that the refi business is still humming. In an ordinary market, processing a refi typically takes about a month, so homeowners often opt for a 30-day "lock" on the mortgage interest rates they're offered, to freeze the rate while paperwork is completed. A 30-day lock typically comes free.

But these days, closing on a refi in 30 days or less is next to impossible. In October, experts recommended consumers look into at least a 45- or 60-day lock period, which may cost you in the form of a slightly higher interest rate or an up-front percentage-based fee -- or both. But it could also save you big bucks.

That's because lenders require a deposit -- 1 percent of the total loan amount is common -- which gets returned to you provided you close on time. If you choose a 30-day lock and fail to close within those 30 days, you can kiss that deposit goodbye. On a $250,000 loan, that's $2,500 gone.

A 60-day lock, for example, might cost you 1/8 of a point more in interest. On a $200,000 mortgage at 6.25 percent, you'd pay a total of $243,316 in interest over the life of the loan. Lock in a 6.375 percent rate, just 1/8 percent higher, and you'd pay $249,186 in total interest, nearly $6,000 more over time.

Regardless of which lock-in period you choose, however, remember that mortgage issuers are still busy. Ask about the consequences of closing late before you decide.  Top of page

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