With mortgage rates sinking to the lowest level since the early 1960s, homeowners around the country are giving themselves an early holiday present: a refinanced mortgage with lower monthly payments.
Should you be doing the same?
The depends mainly on what rate you have now and whether you're planning to move anytime soon. Experts advise taking a careful look at your options before you jump in.
Mortgage brokers were quoting rates as low as 4.5 percent to 4.6 percent this week, a day after the Federal Reserve took extraordinary steps to boost the troubled U.S. housing market and slumping economy. The national average on 30-year fixed mortgages stood at 5.18 percent on Thursday, just over Wednesday's average of 5.06 percent, which was the lowest number since the early 1960s, according to financial publisher HSH Associates.
Here are some answers to common questions about refinancing mortgages.
Q: How much does refinancing cost?
A: It can cost several thousand dollars, but there are ways to make upfront charges invisible to the borrower.
Typically there is a fee that goes to the mortgage broker or lender, plus fees for title insurance, a new appraisal, document processing and other charges. Often, mortgage brokers or lenders can create the appearance of a "no fee" mortgage by adding the costs to a total loan amount or charging a higher interest rate.
Q: So will refinancing my home save me money?
A: That depends on how soon you want to sell.
Let's say you have a $200,000 loan. If you're able to cut your rate from 6 percent to 5 percent, your monthly payment will drop from about $1,200 to about $1,075, so you'll be saving $125 a month. If you have refinancing fees of $3,000, it would take two years to break even — so the refinancing deal is worth it only if you plan to stay in your place longer than that.
"Don't get stars in your eyes based strictly on the interest rate or based on how much money you think you're going to be saving every month," said Kevin Iverson, owner of Reed Mortgage in Denver. If it doesn't make economic sense, he says, "don't do it."
Q: What kinds of loans are out there these days?
A: Your options are far more limited than just a few years ago. The most attractive rates are on the most traditional loans: 15-year and 30-year fixed rate mortgages, and loans for borrowers who have at least 20 percent in a down payment or existing home equity.
Q: What are some common pitfalls?
A: Mortgage brokers are paid by lenders and therefore have the incentive to complete a deal. Not all brokers are dishonest, but unscrupulous ones may try to steer you into a loan that doesn't actually improve your financial situation.
"There needs to be benefit in doing the transaction," said Scott Gormley, owner of Oak Valley Mortgage in Chico, Calif. "It can't be where the broker is just going to make a buck."
Q: What's the difference between a loan modification and a refinanced loan?
A: Loan modifications are for borrowers who are behind on their mortgage. They involve a reduction in the interest rate or a temporary break on payments. By contrast, a refinanced loan is an entirely new mortgage, often made with a different lender, with a new loan that will last either 15 or 30 years.
Q: My existing loan has a prepayment penalty that could cost me thousands of dollars. Should I still refinance?
A: Many of the riskier loans that were made during the housing boom carry prepayment penalties. However, many lenders are willing to waive those penalties and allow borrowers to refinance with another lender if doing so prevents foreclosure, said Scott Stern, chief executive of Lenders One Mortgage Cooperative, a national alliance of 140 mortgage bankers.
"If they let you refinance, they'll lose the loan, but they won't lose any money," he said.
Q: If everybody wants to refinance at once, can the lending industry handle the rush?
A: There could be a backlog as applications surge, especially because thousands of workers have been laid off across the mortgage industry over the past 18 months.
While a refinancing boom is great news for the beleaguered mortgage business, "the industry as a whole is not quite prepared," said Keith Gumbinger, a senior vice president with HSH Associates.