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Borrowers should consider costs and savings when refinancing

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There’s a line at the bank, but you won’t see it in the lobby or at the drive-thru window.

Gary and Margaret Wilkes recently refinanced their home in Harlem, with the goal of paying off their mortgage as quickly as possible. They pay extra on the mortgage and, with the lower rate and accelerated payment, they could save about $30,000.   JON-MICHAEL SULLIVAN/STAFF
JON-MICHAEL SULLIVAN/STAFF
Gary and Margaret Wilkes recently refinanced their home in Harlem, with the goal of paying off their mortgage as quickly as possible. They pay extra on the mortgage and, with the lower rate and accelerated payment, they could save about $30,000.

With mortgage rates at all-time lows, banks are seeing a surge of customers lining up to refinance their homes.

In early November, the number of mortgage applications jumped 12.6 percent, according to data from the Mortgage Bankers Association. Although those numbers dipped slightly last week, falling about 2 percent, more than 80 percent of applications are from homeowners seeking refinancing, according to the survey.

Local banks are seeing the surge as well.

“A lot of folks are refinancing again, probably for the second time in the past 12 to 24 months,” said John Mabery, senior vice president with Queensborough National Bank & Trust Co. “People are coming in to shorten their loan term down to 15 and 10 years. It is amazing how low these rates have gotten.”

IN MID-NOVEMBER, the average rate for a 30-year fixed mortgage dropped to an all-time low of 3.34, according to McLean, Va.-based Freddie Mac. The average 15-year rate slipped to 2.65 percent, also a record.

Even before the record lows, a steady decline in mortgage rates had been causing homeowners to seek refinancing.

In late September, Steve Mason closed on his second refinancing in about five years.

“I made my first new payment on Nov. 1,” said Mason, a master sergeant in the Air National Guard. “I lowered my payment and at the end-term of the loan.”

Mason purchased his three-bedroom, two-bath ranch home near Grovetown in 2006. That was with a 30-year mortgage at about 7 percent interest, he said.

About five years ago he saw an opportunity to save some money when rates dropped to around 5 percent, so he refinanced with Queensborough, reducing the term of the loan to 20 years.

WHEN RATES began falling again this year, he was quick to pounce.

“I was in Afghanistan with the National Guard and saw that the interest rate dropped again, so I told my wife we should get ready when I got back,” he said.

His new loan is for 15 years at about 3.7 percent, which he expects will save him about $45,000 over the course of the loan.

His goal is to build equity as fast as he can, so by the time his son finishes college, he can sell and find his dream home.

“I will probably make additional payments anyway and try to knock it out,” he said.

Mabery said reducing the term of your loan is one of several good reasons to look into refinancing.

According to a recent report from Freddie Mac, about 29 percent of borrowers who refinanced during the third quarter of 2012 chose to reduce their loan term. During that period, about 68 percent of borrowers kept the same term as the loan that they had paid off and 3 percent chose to lengthen their loan term.

Borrowers who refinanced under the Home Affordable Refinance Program (HARP) were more likely to take out a long-term, fixed-rate mortgage, the report said.

Mabery said the number of people seeking HARP loans has increased since changes in program requirement were implemented this year. He said the program is designed for those who can’t get conventional financing and who might not have much, if any, equity in their home. The main qualification is that the previous mortgage had to be purchased by Fannie Mae or Freddie Mac before May 31, 2009.

“People have to look and see what their main goal is in refinancing,” said Mabery. “Is it improving cash flow month-to-month or long- term savings?”

FOR MARGARET and Gary Wilkes, it was both.

They recently refinanced their home near Harlem with the goal of paying it off as soon as possible.

“We just wanted a lower rate, and we are trying to pay it off. The shortest loan we could get is 10 years,” said Wilkes, who is retired.

Refinancing has significantly reduced their monthly payment, but because they usually pay extra each month, the lower payment means the balance will fall a lot faster.

“I hope in three years to have it paid off,” Margaret said. Her bankers tell her that if she continues making the same payment she is making now, she will save more than $30,000 over the life of the loan.

Refinancing seems like a good plan for the Wilkes, but it might not be for everyone.

Bart Chandler, senior vice president at Georgia Bank & Trust, said banks are seeing a lot more applications for refinancing, but that doesn’t always translate into closings.

Some borrowers might not have the right loan-to-value ratio in their properties to make refinancing work, he said.

Even when they do qualify, people need to take a close look at the numbers and their long-term goals before considering refinancing.

“There are a lot of factors to consider,” Chandler said. “The first question is, does it make sense for me to refinance?”

It might not under some circumstances, no matter how low the rates are. For example, if you are nearing the term of your current loan, you have already paid most of your interest costs and refinancing would just restart that cycle.

Also, if you intend to move within the next two or three years, it might be best to hold off on starting another loan.

Chandler said it might be a good idea to sell and buy a new home now, if you can swing it.

“If you are thinking of about selling within a year, you’re better off taking advantage of a lower rate on a new house,” he said.

WHEN NOT TO REFINANCE

You’ve had your mortgage for a long time. In the later years of your mortgage, more of your payment applies to principal and helps build equity. By refinancing late in your mortgage, you will restart the amortization process, and most of your monthly payment will be credited to paying interest again and not to building equity.

Your current mortgage has a prepayment penalty. A prepayment penalty is a fee that lenders might charge if you pay off your mortgage loan early, including for refinancing. If you are refinancing with the same lender, ask whether the prepayment penalty can be waived. Paying a prepayment penalty will increase the time it will take to break even, when you account for the costs of the refinance and the monthly savings you expect to gain.

You plan to move from your home in the next few years. The monthly savings gained from lower monthly payments may not exceed the costs of refinancing – a break-even calculation will help you determine whether it is worthwhile to refinance, if you are planning to move in the near future.

Source: The U.S. Federal Reserve


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