The refinancing quandary: Mortgage rates are low, but not everyone should jump

Mortgage rates are once again below 5 percent. Should you refinance?

Nationally, the average rate for 30-year fixed-rate home loans fell to 4.97 percent in the week that ended Oct. 30, down from 5.04 percent a week earlier, the Mortgage Bankers Association said. The average rate for 15-year loans fell to 4.33 percent from 4.53 percent.

There's a basic rule in the mortgage industry that says if you can lower your rate by at least 1 percent, you should consider refinancing. Rates have fallen so much in the past several months that many people who purchased homes in recent years, or even this year, have loans that fall into that category.

Many Utahns, such as Dan Smith of West Jordan, are trading in rates in the 5 percent range for lower rates. He swapped a 25-year loan at 5.85 percent for a 15-year loan at 4.25 percent.

Although the 1 percent rule is a good start, it's not an absolute. "If you have a loan balance of $400,000 or more, refinancing at even a half of a percentage point less may make sense," said Julia Borst of Metropoint Mortgage in Draper, president-elect of the Utah Mortgage Lenders Association in Salt Lake City.

For example, the payment on a $500,000 mortgage at 6 percent -- not counting homeowner's insurance -- is $2,997. At 5.5 percent, that payment is $158 less, or $2,838.

With lower loan amounts, the difference in monthly mortgage payments is much less, of course. On a $200,000 loan at 6 percent a

half-point reduction results in savings of $64 a month.

Once you know what you'll save, you'll want to figure out how long it will take to recoup the costs of refinancing.

If your savings are $60 a month, it will take about 58 months to recoup $3,500 in closing costs. The bigger the monthly savings, the shorter the amount of time it will take to recoup costs. If you save $200 per month, it will take less than 18 months to recoup.

Even if you're like most people and don't pay closing costs in cash and instead roll those fees back into the loan amount, you'll still want to do this analysis.

Once you find your break-even point, the question to ask is how long do you plan to be in your house. If it takes four years to recoup closing costs and there's a good chance you'll get a job transfer or want to trade up to a larger home before then, refinancing probably doesn't make sense.

Gaylon Ashby of First Colony Mortgage said he periodically gets inquiries from people who want to refinance to get a lower monthly payment but are planning on moving in the next year or two.

"It kind of surprises them when I say it doesn't make financial sense for them to refinance," said Ashby, who is ethics committee chairman of the lenders association.

There also are true no-cost loans that change the decision-making equation. With a no-cost refinance, you'll take a slightly higher rate than you would have been able to get if you paid closing costs -- 3/8 of a percent typically.

If you're not paying anything to get a lower rate than you have, a no-cost refinance still can be a great deal and beats doing nothing at all. But if you plan on being in the home a long time, you're probably better off paying the closing costs and getting the lowest possible interest rate.

As if all this isn't enough to think about, there's another important factor to consider when thinking about refinancing.

Each time you refinance, you're re-starting your loan. If you have only five years left on a 15-year loan, you're going to start over on Day One with new 15-year loan.

The point of course, is to eventually pay off your mortgage. You pay the most interest in the early years of a loan, and over time you gradually begin paying down more of your principal balance. If you refinance in year 10 of a 30-year loan, when you're beginning to actually make some progress, you turn back the clock and begin paying mostly interest again.

That's why it might not make a lot of sense to refinance for those in the last few years of their mortgages.

But suppose refinancing does make sense. Do you get a 30-year, 15-year or even a 10-year loan? Generally, the shorter the loan term, the lower the mortgage rate, although how much lower varies from day to day. Although the monthly payments are much higher, the shorter the term of the loan, the less interest you'll pay and the faster you get to that golden day of being mortgage-free.

Yet in today's uncertain times, it may make sense for some borrowers to stick with the same loan term. For example, if you have a 30-year loan but a 15-year mortgage is appealing, you could still refinance into another 30-year loan but make payments as if it's a 15-year loan. (If you don't know how to do this, your mortgage lender can help.)

Why do this? You'll pay down your loan as fast as someone with a 15-year loan, but you aren't locked into the higher monthly payments. If you run into hard times, you can dial back your payments to lower 30-year levels.

Mortgage lender Alma Hansen of Capital Assets in Murray said many people simply want a lower monthly payment. But if you use refinancing as an opportunity to pay off your mortgage earlier, it can pay off in the long run.

"If you're used to making a $900 monthly payment, and now you only have to pay $700 per month, you could continue to pay $900 per month and you'll pay off your mortgage much more quickly," he said. "One of the best days of your life is when you pay your last payment on your mortgage. Your whole life changes."

While deciding whether to refinance is difficult, there is one simple fact. Mortgage rates aren't going to stay this low forever. It's widely recognized that as the economy improves (assuming it will), mortgage rates will creep back up to the 6 percent range and even higher.

"I don't have a doubt in my mind that rates are going to go up," said Borst, who will direct the Utah Mortgage Lenders Association. "If you want to refinance, and you want something in the 5 percent range, the time is now."

lesley@sltrib.com