NEW YORK -- The drop in mortgage interest rates to 7 percent or less nationwide has created a boom in mortgage refinancing.
The Mortgage Bankers Association of America, a Washington-based trade group, says applications for refinancing have exceeded those for new mortgages for the past eight weeks. The industry predicts 2001 could be the strongest year for mortgage refinancings since 1998, when a record 7.9 million were executed.
"It started right after the Jan. 3 surprise Federal Reserve reduction in rates," said Dan Harris, chief executive of Lowestloan.com, an online mortgage company based in Valhalla, N.Y. "The next day the phone was ringing off the hook."
Although mortgage rates had begun falling late last year, the Fed action cutting interest rates a half a percentage point early in January got the public's attention. That was followed by a second half-point cut on Jan. 31, and further cuts are expected.
There are a number of reasons people seek to refinance mortgages. Some want to lower monthly payments while others decide to swap an adjustable-rate loan for one with a fixed rate, said Doug Duncan, chief economist for the mortgage bankers group.
Many decide to take advantage of the appreciation in property values and take out loans against their increased home equity to help accomplish personal or financial goals.
"People want to get at that money (in their homes) to buy a car, eliminate other high-interest debt, finance college, things like that," Duncan said.
But refinancing doesn't make sense in all cases.
The traditional rule of thumb was that there needed to be at least a 2 point spread between the rate on your existing mortgage, say 9 percent, and the rate on the refinanced mortgage, say 7 percent, to make it worthwhile after a borrower paid the costs for the new loan.
"That adage is pretty much out the window now," said Greg McBride, a financial analyst at bankrate.com. "Competition among lenders has lowered costs, and a lot more of the processing is computerized."
In addition, he added, "consumers have more options, like rolling the costs of refinancing into the loan itself."
Still, a would-be refinancer needs to make sure that he can recoup the costs associated with refinancing, generally the equivalent of 2 percent to 3 percent of the new loan's total value. These costs can include a new appraisal, title search, credit check, attorney fees and closing fees. Borrowers also may be charged a "point," which is a fee paid to the lender to hold down the interest rate on a loan; it's equal to 1 percent of the value of the loan.
There are a number of online calculators that can help you determine if refinancing makes sense. The mortgage bankers site, www.mbaa.org, has one, as do www.bankrate.com and www.hsh.com, which is maintained by HSH Associates, a publisher of mortgage and consumer loan information. Most online mortgage lenders also have calculators.
The savings from a lower interest rate on a mortgage can be significant.
If you took a $200,000 mortgage for 30 years at 8.75 percent (about where rates peaked in May 2000), your monthly payment would be $1,573. At 7 percent, the monthly payment drops to $1,330. That works out to a saving of more than $2,900 a year.
Harris of Lowestloan.com gives this example of how one family refinanced so it could get some equity out of their house and pay off the mortgage faster:
The family was carrying a $136,000, 30-year mortgage at 9.5 percent on a home now valued at $190,000. Their monthly mortgage payment was about $1,160. They decided to refinance with a $160,000 mortgage, but for 15 years at 6.625 percent interest.
That raised their monthly payment to $1,400, which the family could handle, Harris said.
"But they got a couple of benefits from this," he added. "They got $24,000 in cash to pay off some credit cards and have some money for themselves. And by shortening the term (of the loan) and raising payments, they'll save more than $100,000 in interest over the life of the loan."