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Refinance rush

The Baltimore Sun

The economic turmoil of 2008 has left few bright spots, but here's one: Mortgage rates have plummeted.

Rates on 30-year, fixed loans are hovering around 5 percent - the lowest level since Freddie Mac began tracking rates in 1971. Some economists predict a further slide in rates once Barack Obama becomes president and rolls out an economic rescue plan.

And that could mean thousands of dollars in savings for Maryland homeowners.

"The people who have done everything right are now going to benefit, and will be very well rewarded," said Mari Adam, a financial planner and owner of Adam Financial Associates Inc. in Boca Raton, Fla. "We are saying to our clients, anyone who can refinance should refinance. You can save a lot of money. People can make a real difference in their balance sheet."

As consumers struggle with rising costs or job instability, such attractive rates can offer much-needed relief on monthly payments. Other borrowers see an opportunity to pay off a mortgage sooner, or shed a risky adjustable rate and get the peace of mind that a fixed payment brings.

While rates have dropped most on so-called "conforming" 30-year fixed mortgages, rates have drifted down as well on 30-year jumbo loans of more than $417,000 and on adjustable-rate mortgages. Jumbo loan rates, however, are closer to 6.75 percent.

David Junkin of Timonium plans to refinance, not to save money on his mortgage payment but to guard against future increases in the adjustable rate on his home equity loan.

Junkin has a fixed rate of 4.5 percent on his 15-year mortgage. But he has an adjustable rate on his $118,000 home equity loan, which he has used to pay his children's college tuition. He fears that the federal bailout will trigger inflation, saddling him with a higher rate on his home equity loan.

So he plans to bundle the mortgage with his home equity loan and try for a fixed rate below 5 percent.

"It seems that the time is right ... and we have a good credit rating," said Junkin, an engineer who has owned his home since 1992.

Even as Junkin and others jump to refinance loans, some are holding out, hoping for even lower rates.

"The most asked question, the question of the century, is what will rates do?" said Neil Sweren, president of Allymac Mortgage Services in Owings Mills.

With no clear answer to the question, brokers and other experts recommend that homeowners at least find out whether they qualify for a new loan. The housing crisis and credit crunch have left many borrowers owing more than their house is worth, or with damaged credit, putting low rates out of reach for many as lenders have tightened standards.

But for those who do qualify, the opportunities are out there, with rates as low as 4.5 percent on 30-year mortgages.

Opinions differ on whether to lock in a rate that offers immediate savings, or gamble that rates will go lower.

"A lot of people are putting in applications ahead of time and waiting for a certain rate," said Earnest Sahady, owner of Nationwide Mortgage Services, a mortgage lender and broker in Rockville. "We don't expect rates to go much lower at all. If people are out there needing to pay off debt or change their adjustable-rate mortgages to a fixed rate, this is the time to do it."

Adam, the financial planner who says many of her clients are trying to refinance now, is considering a refinance of her own mortgage as well.

"But I'm more tempted to wait a month or two," she said. "When a new administration comes in and rolls out a stimulus [program], there may be further incentives for homeowners."

All agree that borrowers need to look beyond the low rates before plunging into a new mortgage. Refinancing makes sense for some situations, but not all.

Refinancing can cost from $2,000 to $3,000 or more in closing costs, and restarts the clock on the term of a new mortgage, whether for another 30 years or 15. Homeowners with a relatively small principal balance or with few years left to pay off a loan typically won't benefit from a refinancing, brokers said.

And refinancing probably won't make sense for borrowers who already have a fixed rate of 5 percent or below.

"You have to have some sense of what you're trying to accomplish," said Keith Gumbinger, a vice president at HSH Associates. "For many borrowers, that is to save money, but for many borrowers refinancing turns out to be a money-loser because they don't stay in the house long enough to get your money back from the transaction."

For instance, if you pay $2,700 in closing costs and cut monthly payments by $150 a month, it would take 18 months to break even.

Rates have been dropping since late November, when the Federal Reserve stepped in to boost the housing market and spur the economy by making financing less costly and more readily available. The government, pledging a total $800 billion, plans to invest in mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae as well as debt issued by those government-sponsored corporations. The program should also improve credit card loans, auto loans and other borrowing.

The Fed's announcement initially sent mortgage rates down to the lowest levels since February, and rates have continued their slide. As of yesterday, HSH reported an average daily rate of 5.11 on a 30-year, fixed loan. In its most recent report last week, Freddie Mac reported an average rate of 5.10 on 30-year loans, down from 6.04 percent the week that ended Nov. 20.

Still, for the most troubled borrowers, especially those with damaged credit, refinancing is likely not an option at all. Lenders and banks have tightened credit standards amid the turmoil in the housing and financial markets.

"If you can't pay your bills, can't prove your income and have no equity in your home, you're out of luck," Sweren said.

Today's borrowers face more stringent credit standards than in the past.

For a conventional loan, lenders typically require a 620 credit score as a minimum, while FHA loans typically require a score of at least 550. Borrowers with lower scores may be able to refinance if they have adequate equity. The lower the credit score and the higher the loan-to-value ratio, the higher the interest rate for a borrower.

Borrowers who want to take advantage of low rates but lack the cash up front for closing costs can roll the closing costs into the loan, which increases the principal amount. Or they can choose a "no-cost" loan, taking a slightly higher interest rate (typically one-fourth to three-quarters of a percentage point more), while the lender absorbs the costs.

For some borrowers, refinancing will bring higher monthly costs. Those switching from adjustable to fixed mortgages will likely get a higher rate and a higher monthly payment. But they also get the peace of mind of a relatively low, fixed rate over the long term, brokers said.

"It's a great opportunity to correct what may have been a mistake a few years ago, or seemed like a good decision at the time," Sweren said. "It's a chance to put it into something permanent."

TIPS FOR REFINANCING

* Use a refinancing to reduce monthly payments, consolidate debt, tap built-up equity or switch mortgage products.

* Shop around among brokers and lenders to find the best deals or seek a "loan modification" from your current lender.

* Don't be stopped by the traditional rule that borrowers must reduce their current rate by at least 2 percentage points to benefit.

* Consider how long you plan to stay in your home to help determine when - or if - you will save money.

* Consider the impact of closing costs, which include appraisal, title research, title insurance, credit check, attorney review, inspection fees and transfer taxes. Some costs could include loan points - one point typically equals about 1 percent of the amount you borrow.

* Consider that most lenders will let you borrow about 80 percent of your home's current appraised value.

* Calculate estimated savings and costs using an online calculator, available through sources such as bankrate.com or hsh.com.

Source: HSH Associates; Adam Financial

Associates Inc.

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