Reasons remain to refinance
By Holden
Lewis • Bankrate.com
Mortgage bankers say a refinancing boomlet
is at hand. Almost half of mortgage applications are filled out
by homeowners who want to refinance their loans.
The Mortgage Bankers Association estimates that
homeowners will refinance $1.19 trillion this year. That comes as
a surprise: Early in the year, economists had expected refinancing
volume to be half that. But rates have remained lower than expected,
and the average rate on 30-year fixed mortgages dipped below 6 percent
in early August and stayed there. That's when this refi boomlet
began.
People have many reasons to refinance, even
now: to get rid of mortgage insurance, to switch from a fixed-rate
loan to an adjustable or vice versa, to extract cash from a house
that has grown in value and, of course, to lock in a lower rate.
Bye-bye, PMI
When you borrow more than 80 percent of the home's sale price, you
usually have to buy mortgage insurance. The amount you pay depends
on the percentage of the home's price that you borrowed, called
the loan-to-value ratio. A way to get out of paying mortgage insurance
is to get a "piggyback loan" -- a second mortgage on top
of a first mortgage for 80 percent of the home's price.
If you pay for mortgage insurance and your mortgage
is more than two years old, you might be able to get rid of the
mortgage insurance payment by refinancing the loan. This will work
if the home has appreciated in value substantially. If your current
loan balance is less than 80 percent of the reappraised value of
the home, you can refinance and get rid of mortgage insurance.
There are a lot of catches and caveats, so you
should call your mortgage servicer to find out if you qualify to
refinance
your way out of paying mortgage insurance.
Hello to ARMs
One of the biggest reasons to refinance is to switch from a fixed-rate
loan to an adjustable-rate loan, says Doug Perry, first vice president
for Countrywide Home Loans. He believes that a lot of homeowners
would benefit from switching to what he calls "fixed-period
ARMs," also known as hybrid ARMs. These adjustable-rate loans
have a fixed rate for a specified period, then adjust annually thereafter.
One with an initial rate that lasts three years, then adjusts annually,
is called a 3/1 ARM. The rate on that initial period is lower than
the rate for a 15- or 30-year fixed-rate loan, so borrowers save
money.
Perry gives a hypothetical example of a homeowner
who refinanced in 2002 to a 30-year fixed-rate loan. "They
don't have any intention to stay in their house another 28 years
and they call in and realize that, 'Gosh, I can save a lot of money
by refinancing and going to a fixed-period ARM,'" Perry says.
Bankers say that a homeowner who plans to move
up to another home in three or four years can save a lot of money
with little risk by refinancing from fixed-rate loans to 3/1 ARMs,
whose initial rates are often about 1.25 to 1.5 percentage points
lower than the rates for 30-year fixed loans. Homeowners who plan
to move in five or six years would benefit from switching to 5/1
ARMs, whose initial fixed-rate period lasts five years.
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