To refi or not to refi ... For millions of homeowners, that's the question as mortgage rates spiral downward this summer.
Lots of them are refinancing older mortgages to capture today's stunningly low rates and save tens of thousands of dollars over the life of their loans in some cases, hundreds of thousands.
But is refinancing worth the cost and trouble if your current mortgage is at a sub-8 percent rate already pretty cheap by historical standards?
There's a good chance it will be, if you'll stay in the home long enough.
The Mortgage Bankers Association of America reported Wednesday that the number of mortgage applications hit a record high last week, with nearly seven of 10 applications representing refinancings.
Obviously, the driving force is low rates. The standard 30-year fixed-rate mortgage averaged 6.22 percent last week, down from 6.31 percent the week before, the MBA said. That's a remarkable low, not seen in three decades. A year ago, that rate averaged around 6.92 percent.
Meanwhile, 15-year fixed-rate mortgages set a new low of 5.63 percent, down from 5.69 percent the previous week. A year ago it was around 6.65 percent.
Homeowners can thank the poor stock market, which is causing investors to shift money into bonds. When bond demand goes up, interest rates fall.
So, is it time for you to refinance your home?
Yes if you'll have the mortgage long enough for the lower rate to save you enough to cover the fees and other costs of refinancing.
First, question prospective lenders closely about the application and appraisal fees, title insurance charge and any other costs. It's easy to research interest rates at Web sites such as www.bankrate.com, run by the rate-tracking outfit Bankrate.com. But you have to talk directly to the lender to find out about closing costs, which can vary widely.
Once you've found an attractive deal, figure out how much you'll save each month by reducing your interest rate. You can do this with the loan amortization calculator that comes with most financial software, such as Quicken or Microsoft Money. There also are many online versions, including a really good one aimed at refinancings at www.hsh.com, the site of Butler, N.J., mortgage-data firm HSH Associates.
Cutting 1 percentage point to end up at 6.17 percent, would reduce the monthly payment for every $1,000 borrowed to $6.11, from $6.77.
On a $200,000 loan, that would add up to $132 a month. If the refinancing cost $3,000, it would take just under two years for the savings to cover the costs. Keep the new mortgage longer than that and the refinancing would start to yield real savings. Move sooner, and it wouldn't.
Use the same approach to decide whether to pay "points." Each point is an upfront fee equaling 1 percent of the loan amount. By paying one, two or three points, you can get a slightly lower interest rate that would reduce your monthly payment. If you expect to have the mortgage for many years, this saving could more than make up for the cost of paying points.
As you see with the figures above, you also get a lower rate by taking out a 15-year mortgage instead of a 30-year. The monthly payment will be higher with a 15-year term, since the principal, or amount borrowed, has to be paid back twice as fast. But, if you can swing the higher payment, you can save a fortune in interest.
Total interest for a 30-year, $200,000 loan at 6.17 percent would be $239,577. For a 15-year loan at 5.55 percent, it would be just $95,106.
Of course, you won't save money if you continually refinance in a way that keeps you from ever paying off the loan. If you were 15 years into a 30-year loan and you took out a new 30-year loan, you'd be taking on an additional 15 years of payments.
You can avoid this problem by taking out a new loan that will be paid off at the same time as the old one would be, or sooner. If you're halfway into a 30-year loan, for instance, take out a new mortgage for just 15 years.