The Wall Street Journal
By: Amy Hoak
November 2, 2010
'Window of Opportunity' Opens for Some as Mortgage Rates Hover Near Lows
Low mortgage rates have some homeowners considering refinancing, even if it has been less than a year since they last refinanced or bought their home.
Rates have been hovering near all-time lows, with the 30-year fixed-rate mortgage averaging below 4.25% for the past three weeks, according to Freddie Mac's weekly survey of conforming mortgage rates. But they could be ready to head up: Last week, the Mortgage Bankers Association said rates on 30-year fixed-rate mortgages look poised to rise in the year ahead.
In short, those who aren't thinking about refinancing probably should consider the possibility, if they have the necessary income, credit and home equity.
That is true even if you are a borrower who secured a 5% mortgage rate on a 30-year fixed-rate mortgage last year. Assuming a loan balance of $200,000, if you could refinance into a 4.25% mortgage today, the savings would be about $100 a month, said Greg McBride, senior financial analyst for Bankrate.com. It could take about 3½ years to recoup the costs of the refinance, but those who bought in 2009 presumably would plan on staying in the home long enough for the refi to pay off, he said.
"If they just bought the place in the last year or so, chances are their timetable hasn't changed dramatically, yet mortgage rates have--and that opens the window of opportunity to refinance," Mr. McBride said. Those homeowners presumably still plan to live in the home for a number of years, and therefore have plenty of time to recoup the costs of a refinancing.
When it comes to refinancing, "the biggest decision is how long is it going to take to recapture" the cost, said Cameron Findlay, chief economist for LendingTree, an online marketplace that connects consumers to lenders. "If you bought a year ago, you're probably a good candidate."
For those who refinanced within a year, the likelihood that they will pull the trigger again isn't quite as high. "There are many homeowners for sure who don't have the tolerance for paying two sets of closing costs, because it's a lot of money out of pocket now for a modest monthly savings that will take some time to completely recoup," Mr. McBride said.
But Chris and Emily Gessner decided the amount they were able to save was enough for them to refinance for the second time this year. They also were able to secure a "zero-cost" mortgage, where the upfront costs normally associated with mortgages are folded into the new loan either through an increased loan amount or through a higher interest rate.
Last month, the Gessners refinanced the loan on their Chicago home into a 3.75%, five-year adjustable-rate mortgage. They last refinanced in April.
With each refinancing, they shaved more than $100 off their monthly payments, Chris Gessner said. "We wouldn't do anything for less than a $100 difference. That was sort of the benchmark," Mr. Gessner said. It is too much of a hassle to do it for less, he said.
Should you refinance your young loan? Consider the following two points.
• Find local rates and home values: Mortgage-interest-rate surveys such as Freddie Mac's give national averages each week, but market and lending factors will cause rates to be higher in some parts of the country and lower in others, Mr. Findlay said. Understand what the going rates are for your area.
The same goes for home values. Before shelling out money for an appraisal, look at online listing sites and talk to real-estate agents or appraiser friends who know how home prices in your area have changed since you got your mortgage. If you don't, you could be getting your hopes up in areas where home prices are still declining, said Kevin Marshall, president of Clear Capital, a real-estate valuation and data provider.
"It's tempting to look at the national levels and gain confidence or lose confidence," he said. Don't be fooled by averages, and look at local trends. If the value of your home has dropped since your last loan closed, it could make refinancing more difficult or perhaps not worthwhile.
• Closing costs: In general, closing costs will typically be around 1.5% to 2% of the mortgage, Mr. McBride said, so assume they could add up to $4,000 for a $200,000 loan. Costs also vary by location.
It is possible to find a "zero-cost" mortgage like the one the Gessners chose, but be aware that you will pay those costs in another way, either with a higher loan amount or a higher interest rate.
In a falling rate environment, tolerating an interest rate that is a little higher is acceptable to many borrowers--including the Gessners--if it means they won't have to cover the costs out of pocket, said Dan Green, a loan officer with Waterstone Mortgage in Cincinnati and author of TheMortgageReports.com, who handled the Gessners' refinancing.
"Instead of getting the absolute lowest rate available and paying closing costs to get it, homeowners willingly accept a slightly higher rate. In exchange, all closing costs are paid by the bank, on behalf of the homeowner," Mr. Green said.
For example, a 4% mortgage could end up rising to 4.25% if the loan was a zero-cost mortgage, with $3,740 (the average closing cost for a $200,000 mortgage, according to Bankrate.com) paid by the lender, he said.
But as Mr. McBride points out, by paying closing costs out of pocket instead, "you will be able to reduce your monthly payment most significantly."
Write to Amy Hoak at firstname.lastname@example.org