MORTGAGE INTEREST rates are fascinating. People always check the numbers, determining whether it now makes sense to take the big plunge and purchase a home, or perhaps refinance a residence.
Charting rates can be more interesting -- and nerve wracking -- than any roller-coaster ride.
While rates over the last few weeks have started trending upward, many economists still feel that the overall trend is down, possibly to the 9.5 percent range.
A number of people now or in the near future may consider refinancing. But they question whether the hassle associated with the procedure is worth the effort.
That depends on your situation, how long you intend on staying in your abode and if you like saving money.
Current refinancings may not be due to sharp drops in rates. Instead, homeowners may want to shake out the equity in their home to finance other things, like a child's education, or to pay off credit cards.
"Right now, about 25 percent of the mortgage business we're doing is refinancings," said Robert Amico, sales manager for Norstar Mortgage Corp. Norstar's Western New York projection is for $100 million in new mortgages written this year; $25 million will be refinancings.
Amico said that the current rates have brought two groups of refinancing customers. Some want to lock in the current rate; others complete the paperwork but let the rate float. The ploy is they are hoping the experts are correct and that rates still have some drop left.
Mortgage experts generally agree that the 2 percent rule of thumb works well for those mortgagees sitting with a conventional loan.
"If there is a 2 percent spread between the rate that you currently have and the going rate, then there is room for refinancing," said Terry Downing, a Williamsville-based financial planner with the firm Downing & Bartels.
The 2 percent spread worked well in 1986-87 when a wave of refinancings shook the real estate industry. Financial institutions at the time reported that as much as 75 percent or more of their mortgage business was refinancings. People gladly traded-in their 14 percent to 18 percent loans for debt with rates in the high 8 percent range.
But the number of remaining fixed-rate, 12 percent mortgages is believed to be small. Financial institutions contacted feel that the bulk of refinancings during this cycle will involve people who three or four years ago took adjustable rate mortgages.
Many times ARMs offered a low initial, so-called teaser rate, and since have increased two or three times. The tease now is figuring out how to pay the monthly amount. Today, ARMs comprise just 20 percent of all home mortgages.
ARMs don't follow the 2 percent rule; in some cases, if an ARM and a fixed mortgage are close or the same, it may make sense to refinance.
"People with ARMS have to determine how comfortable they are with a loan that has gone up two or three times and is still sitting with a 14 percent or 15 percent cap," said Gary Hutchings, a vice president in M&T Bank's Residential Mortgage Division. "Refinancings of ARMs would seem to make sense unless a person was comfortable with that 14 percent or 15 percent."
Hutchings said that, through the first 18 days of the new year, about 35 percent of M&T's statewide mortgage business was refinancings, about $5 million. Normally, 15 percent to 20 percent of business is refinancings.
But attractive rates may not be enough to warrant refinancing. Homeowners must be sure of the costs associated with the switch, and determine how long it would take to recoup those costs.
"The decision boils down to this: Is the present value of the interest saved over the term of the mortgage greater than the upfront costs of refinancing?" said David Barrett, a partner and director in the Buffalo accounting firm Freed Maxick Sachs & Murphy.
For example, if a refinancing is going to cost $6,000 and save $50 per mortgage payment, it would take 10 years to break even. However, if a refinancing costs $2,000 and saves $175 per month, costs are recouped in just 12 months.
"You have to stay in a house long enough to recoup costs," said Ronald A. Teplitsky, department executive, residential mortgage banking in charge of retail marketing for Marine Midland Bank. "If you're staying less than three years, it makes little sense to refinance."
Refinancing also must be considered from a tax point of view. Generally, financial institutions charge points to refinance. Remember from your original mortgage maneuvers that a point is 1 percent of the amount financed.
The IRS has ruled that prepaid interest, including points, cannot be deducted all at once, but must be capitalized over the life of a loan.
Like most IRS rules, there is an exception. If the points are paid in connection with the purchase or improvement of a principal residence, the entire amount can be deducted next time taxes are filed.
Some homeowners are refinancing amounts larger than the balance of the old loan. The excess can be treated as a home equity loan and that interest can be immediately deductible, as long as the excess debt over the mortgage amount doesn't exceed $100,000.
If you do intend to refinance, at least the wait to consummate the deal won't be as long as the initial mortgage procedure. Marine's Teplitsky said that, depending on how smoothly things go, the wait is minimal, perhaps just one or two days.