Full Refinancing

First, here's the good news. An owner who trades a $100,000 fixed-rate, 30-year mortgage at 10% for the same loan at 8% is happily saving $144 a month before taxes. Refinancing means paying off your old loan and getting a new first mortgage. Now the bad news. It generally means paying fees for origination, appraisal and credit check, and points, too.

What if your rate is 9.5%, or you paid to refinance a couple of years ago, or you have an adjustable-rate mortgage (ARM) with an adjustment due soon? Is refinancing worth it?

A home-equity loan or second mortgage may be the fastest way to tap your equity, but refinancing could be the better route in any of the following situations:

■ Interest rates have fallen 2% or more below what you are now paying;

■ Rates aren't quite 2% less, but you plan to stay put; or

■ You figure you could pay off a new loan in less time with roughly the same payment you are making on your current mortgage.

Do you have remodeling in mind? Say your home is worth $200,000 and the mortgage balance is $75,000. You could refinance for $125,000 at a new lower rate, use $75,000 to pay off the old loan and free $50,000 of home equity for remodeling. Lower interest rates mean you could get a bigger loan without a big increase in monthly payments. For example, the principal and interest payment on a $100,000, 10%, 30-year, fixed-rate mortgage is $878. With rates at

YOUR REFINANCING WORKSHEET

This worksheet lets you figure out how long it will take to pay yourself back if you

refinance. Figures for the example, based on a $100,000 loan, are typical. To compute

your new monthly payments for the second step of the Payback

section, refer to the

table on pages 152 and 153.

EXAMPLE

YOUR LOAN

The Cost of Refinancing

Points

$ 1,000

$

Application fee

35

$

Title search and insurance

500

$

Inspections

200

$

Survey

150

$

Lender's underwriting fee

200

$

Credit report

50

$

Appraisal

250

$

Lawyer's fees

250

$

Recording fees

50

$

Transfer taxes

1,000

$

Other (prepayment penalty, etc.)

+ 0

+

Equals Total Cost of Refinancing

$ 3,685

$

The Payback

Current monthly mortgage payment

(principal and interest; based on

30-year fixed-rate at 10%)

$ 878

$

Subtract new mortgage payment

(P&I; 30-year fixed-rate at 8%)

- 734

-

Equals pretax savings per month

$ 144

$

Multiply your tax rate (eg., 27%) by

pretax savings and subtract result

- 39

-

Equals your after-tax

savings per month

$ 105

$

Divide total cost of refinancing

$ 3,685

$

by monthly savings

- 105

Equals Number of Months to Break Even

35

7.5%, if you refinanced for $130,000 and used the money left after paying off the old loan for home improvements, monthly principal and interest payments on the new loan would be $909—just $31 more than on the old loan.

Refinancing can make sense even if you don't need to tap the equity in your home. Consider refinancing anytime there's a difference of two percentage points or more between your fixed-loan rate and current rates. The two-point rule works in your favor when you stay in the house long enough for lower monthly payments to offset the costs of refinancing—usually several years. Refinancing with less than a two-point differential can be advantageous if you plan to live in your home for a long time. Even a 1.5-point spread can do the trick when you stick around more than seven years. (Since ARM rates can change, refinancing from a fixed-rate loan to an ARM is more problematic.)

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