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Weighing the Refinancing Choices

Homeowners are swarming to redo their mortgages again. Many lenders put refinancings at half the new business coming in. Getting a new loan gives you a chance to get your monthly payments down. That frees up money to help you deal with other bills.

Behind the boom: a drop in interest rates and mortgage fees. Last year at this time, interest rates on fixed-rate loans averaged 9.3 percent, according to HSH Associates Inc. in Butler, N.J. Now they're at 7.3 percent. Upfront costs are also down. That makes it profitable to refinance for a rate cut of around 1 percentage point, said John Lewis, managing editor of Inside Mortgage Finance, a newsletter based in Bethesda. With big mortgages -- say, $500,000 -- you might be ahead if you save just one-half of 1 percentage point.

Here's the traditional way of telling whether refinancing will pay:

Compare the new loan's upfront cost with the total amount that you'll save in monthly payments each year. Upfront costs could include such things as title insurance, legal fees, document fees, appraisal fees and points (a point is 1 percent of the loan amount). Probable range: $1,500 to $2,000. Costs will typically be higher if you refinance for a larger amount than you owe now. Some lenders, however, charge zero up front, especially on mega-loans.

You should refinance if your savings exceed your costs over about two years (assuming you'll be in the house that long).

There are other gains to be gotten from refinancing:

You could switch from a variable-rate to a fixed-rate loan. This accounts for a majority of refinancings today, said Richard Beebe of BankAmerica Mortgage. Monthly payments on variable mortgages rise and fall with interest rates; fixed mortgages, by contrast, cap the amount you have to pay. Your payments won't rise, and they could fall if rates decline and you refinance again.

When you go from a variable to a fixed mortgage, your monthly payment might not fall but your anxiety level will.

Switch from a 30-year to a 15-year mortgage. That's the choice of about one-third of people who are refinancing, said Donna Callejon, a senior vice president of Fannie Mae, the housing finance corporation.

After the switch, your monthly payment probably will stay level or rise a little, because you're repaying the loan over a shorter term. But the interest rate on 15-year loans typically is lower by one half of 1 percentage point than the rate on comparable 30-year loans, says Doug Robinson of the Federal Home Loan Mortgage Corp. You'll build equity faster and pay much less interest for as long as you hold the loan.

One popular choice today is a hybrid mortgage: One with a fixed rate for anywhere from three to 10 years and a variable rate thereafter. Monthly payments are lower than on pure fixed-rate loans. But consider a hybrid only if you expect to move within the fixed-rate period. If the fixed term runs out and rates have jumped, you may be hard-pressed to pay.

In some states you can cut your upfront costs, or shave a bit off your mortgage rate, by accepting a mortgage with a prepayment penalty. In return for the price cut, you agree to keep the loan for three to five years and pay a penalty if you don't. Penalties vary from bank to bank.

But consider this loan only if you'll stay in your house for several years and don't expect interest rates to drop. (If they do drop, you might save more money by being free to refinance.) The best loans charge the penalty only if you refinance, and waive it if you move or add small prepayments to every regular payment you make.

Start your search for a cheaper loan with your own lender. It might give you a break on the upfront costs to keep you from going somewhere else. Mortgage company rates are especially attractive today and banks are scrambling to keep up.

When you're mortgage shopping, don't look just at the interest rate. Lenders today are competing for your business with lower upfront costs, lower down payments and faster mortgage approvals. CrossLand Mortgage, based in Salt Lake City, has just announced it will use a new loan-screening process developed by Fannie Mae. It should give you a "yes" or a "no" in minutes, pending an appraisal of the property.

If you haven't enough time to compare prices yourself, look in the Yellow Pages for a mortgage broker. He or she can do the shopping for you. It generally doesn't cost any more to borrow through a mortgage broker than to deal with a lender directly.