It's not every day you can save yourself tens of thousands of dollars. When it happened recently to Chris Overstreet, he was understandably overjoyed.
"I was shaking I was so happy," said Mr. Overstreet, who refinanced his home last month.
The Evans resident saved $120,000 in interest charges by swapping his 30-year mortgage for a 15-year mortgage with a monthly payment that is only $60 higher. And all it took him was 1 1/2 hours with his Bank of America mortgage officer and an attorney.
As one of millions of Americans taking advantage of a 40-year low in mortgage rates, Mr. Overstreet equates refinancing with putting money in his pocket.
"I had never made that much money before," he said.
The recent rate drop has created the largest refinancing boom since the fall of 1998 as homeowners, many of whom bought homes in the 7.5 to 8.5 percent range, look to reduce their monthly payments or shorten their loan terms with rates as much as two percentage points less than what they had been paying.
Meanwhile, high-equity homeowners in search of low-interest loans are looking into "cash out" refinances to pay off high-interest debts or invest in their children's education.
"I would say refinancing is probably at an all-time high," said Anita Ivie, vice president and mortgage manager for SunTrust Bank.
But for many, the decision to refinance is a confusing one. The notion that refinancing makes sense only when rates fall two percent below your current mortgage is no longer an iron-clad rule. And the number of options available to consumers has never been greater.
"Like many industries, we have found more creative ways to do things," said Bart Chandler, the vice president of mortgages for Georgia Bank & Trust Co. and former president of the Mortgage Bankers Association of Georgia.
The payback period
The litmus test for refinancing is fairly straightforward: Will you live in the home long enough to recoup the costs of the refinancing?
Yes means you should consider it. No means you should keep mailing in your current mortgage payment.
Homeowners sometimes forget refinancing a home costs money, usually anywhere from 1 to 3 percent of the amount being refinanced. The money, commonly known as "closing costs," covers the fees charged by bankers, attorneys and others involved in the refinancing process.
For example, a homeowner who refinances a $100,000 mortgage who pays $3,000 in closing costs to reduce the monthly payment by $100 will have to keep the home at least three years before seeing any real savings.
That's why upwardly mobile workers, or those with jobs that demand continual relocation, might want to hold off.
"If you are a resident at the Medical College of Georgia and are only going to be there another three years, then it's probably not worth it," said Michael Cave, a certified financial planner in Augusta.
Any mortgage lender can run the numbers and give you an idea of how long it will take before you realize the benefits of a refinance. There are also do-it-yourself mortgage calculators, including online versions offered by HSH Associates (www.hsh.com) and the Mortgage Bankers Association of America (www.mbaa.org).
Another way to tell whether refinancing is right for you is to determine how many years remain on your existing mortgage. Homeowners who have paid well into a 30-year mortgage, for example, would be unwise to swap it for another 30-year mortgage.
"I'd hate to see someone 20 years into 30-year mortgage refinance just to lower the payment," said Tom Bird, the vice president of First Bank of Georgia's mortgage operations.
When homeowners determines they can benefit from a refinance, they should spend a little time shopping for lenders.
Mortgage rates vary daily, so consumers should be sure to make an "apples to apples" comparison when evaluating various deals. One way to do that is obtain a "good faith estimate" from lenders that spells out the amount of closing costs you will likely pay. Most originators can produce the estimate within a few hours.
Aside from cost, your mortgage officer should be someone you believe is trustworthy and who will provide good service. Institutions affiliated through the Mortgage Bankers Association of America, for example, must abide by certain ethical codes.
Homeowners with lackluster credit may have to work through the so-called "subprime" lenders that specialize in higher-risk financing. Although the industry has been stigmatized by the predatory lending practices of a few, the majority of these lenders are reputable and follow the same code of ethics as other mortgage companies.
When shopping, consumers should have the paperwork on their original mortgage handy as they call or schedule an appointment. The information will help lenders prepare the estimate and can give you a better idea of your before-and-after costs.
Consumers also should find out whether their mortgage is "convertible," meaning it has a built-in refinancing clause that carries minimal closing costs, usually 1 percent of the outstanding loan balance.
After consulting with the lender, you should have an idea of what type of refinance package you want.
Typically, refinancing means swapping one mortgage for another that carries a lower interest rate. But many homeowners can go one step further and swap their long-term mortgage for one with a shorter term, which is what Mr. Overstreet did.
His original 30-year mortgage carried an interest rate of 8.25 percent. His new 15-year mortgage has a rate of 5.8 percent. The combination of lowering the rate and reducing the time interest accrued on the loan is what allowed him to shave $120,000 in finance charges.
"That's a tremendous savings for what is only a slight increase in his monthly payment," said Bank of America's Rick Murphy, Mr. Overstreet's mortgage originator.
Of course, homeowners can shorten the length of their loan without refinancing by simply making an additional payment toward the principal, although financial advisers say most consumers lack the discipline to make extra payments on their own.
"People break down when following through," Mr. Cave said. "It's human nature."
When working with a lender, homeowners should inquire about the less-common 10-year and 20-year mortgages, as both could be viable options. In any event, reducing the loan-term usually reduces the private mortgage insurance premiums many homeowners must pay until they reach 20 percent equity in their homes.
A strategy for homeowners with plenty of cash on hand is paying discount "points," which are up-front interest charges that allow you to "buy down" the interest rate. A point is equal to 1 percent.
As with closing costs, you should plan to live in the home long enough to recoup the points you pay.
Once you and the lender agree on a refinance strategy, it's time to "lock-in" a rate for your new mortgage.
Locking-in essentially allows you to keep a rate on hold - up to 45 days in most cases - while you complete the paperwork. The good news is, your rate is intact even if rates rise at a later date. The bad news is your locked-in rate remains the same even if rates fall.
"I usually tell customers if they are happy with the interest rate, they should go ahead and lock," Ms. Ivie said.
Locking in a rate is similar to entering a contract, although there is no real penalty for backing out before the closing date. However, don't expect to keep rate shopping - most lenders will not work with you if they know you are locked in with another company.
Mortgage rates tend to move 1 percent above the yield of long-term U.S. Treasury securities, which are difficult to forecast, said Donald Schunk, a research economist for the University of South Carolina.
However, Mr. Schunk said mortgage rates and other long-term interest rates will probably rise in response to inflation concerns sparked by recent cuts in short-term interest rates by the Federal Reserve Bank.
"We simply have to be close to the bottom as far as mortgage rates go," he said.
Reach Damon Cline at (706) 823-3486 or firstname.lastname@example.org.