When is the right time to take the refinancing plunge?

Kenneth R. Harney
Friday, November 12, 2010; 9:38 PM

When the Federal Reserve recently rolled out its plan to pump $600 billion into the credit markets, many homeowners and buyers may have thought that because mortgage interest rates are likely to fall again, they could postpone the loan application they were contemplating.

Federal Reserve Chairman Ben Bernanke offered implicit support for that scenario when he wrote in a Nov. 4 Washington Post op-ed column that as a result of the $600 billion infusion, "lower mortgage rates will make housing more affordable and allow more homeowners to refinance."

But wait a minute: Haven't 30-year fixed mortgage rates been hovering around 4.25 percent, the lowest level on record since April 1951? Aren't 15-year mortgages just above 3.6 percent? How much lower could rates possibly go?

We are well into a refi boomlet, with lenders reporting 70 percent to 85 percent of new mortgage volume going to refinancing, so how much more of a market share can the Fed expect?

Housing economists generally don't anticipate significant direct effects on mortgage rates from the Fed's move. David Crowe, chief economist of the National Association of Home Builders, says the likely effect will be to restrain rate increases that otherwise would occur over the coming year, as the economy warms up. Amy Crews Cutts, deputy chief economist for mortgage giant Freddie Mac, says the $600 billion may only "tweak" rates downward.

"Four and an eighth is far more likely than 4 percent" on 30-year fixed-rate loans, she said in an interview, because the Fed is not buying mortgage-backed securities but rather Treasury bonds.

This raises the question: Does it make more sense to wait for a rate bottom that might not materialize, or to lock in rates now at multigenerational lows?

Cutts's answer is based on her own experience. She recently refinanced her home loan through a mortgage broker to 4.5 percent fixed for 30 years, and is saving $100 a month on payments. What is she doing with the extra $100? Putting it toward her new mortgage, reducing principal to shorten the term of the note and paying it off sooner. Crowe has refinanced two loans in recent months.

Peter Ogilvie, president of First Residential Mortgage Corp. in Santa Cruz, Calif., says "refinancing makes sense for just about anybody with a rate over five and a quarter percent," and often produces monthly savings even for people with notes in the upper 4 percent range - provided, of course, that they can qualify under the industry's toughened credit and loan-to-value underwriting standards.

Some homeowners may be good candidates for "no-cost" refinancing, where the title, escrow and closing costs are added to the principal or are paid over time with a slightly higher note rate. The idea here, Ogilvie says, is to reduce monthly housing payments.

Jeff Lipes, senior vice president of Family Choice Mortgage near Hartford, Conn., and president of the Connecticut Mortgage Bankers Association, has what he calls a 24-month rule of thumb for deciding whether refinancing makes sense: If you can pay for the closing and other costs of the rate reduction in about two years, you should consider it.

Take this example: Say you have a 5.75 percent fixed-rate loan at $200,000, paying $1,167 a month in principal and interest. If you refi to a fixed-rate $200,000 loan at 4.75 percent, you'll pay $1,043 a month, a $124 monthly saving, or $1,488 a year. Because prepaid charges, tax escrows and closing costs will come to about $3,000, Lipes calculates, you should recoup virtually all your costs in the first 24 months.

Steve Stamets, a loan officer for Union Mortgage Group in Rockville, says homeowners who would like to be debt-free faster should consider a refi out of their current 30-year loan into a 15-year term. Fifteen-year mortgages carry lower rates, but their faster amortization schedules require higher monthly payments.

Here's an example, using the no-cost option: Say you took out a $300,000 fixed-rate loan at 5 percent interest during the rate dip in 2003. The current balance is about $264,000, with monthly principal and interest of $1,613. Rolling the closing, insurance, taxes and other loan costs of about $5,000 into a new $269,000 15-year mortgage at 3.75 percent results in a payment of $1,958. If you can afford it, that extra $345 a month will save you many thousands of dollars in interest, Stamets says. And you'll be mortgage-free in 15 years.

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