'Tis the season....for mortgage refinancing?

Dear Readers,

Attached is a great article about refinancing your home's mortgage. If you bought in the last two years at a higher rate, perhaps now is the time to take advantage of better terms and maybe evenelimimate your second mortgage or HELOC if your home's value has risen enough to get you under the 80% loan-to-value mark.

By Kenneth R. Harney
Syndicated Columnist

You may be thinking Christmas, Hanukkah, Kwanzaa and sugarplums, but thousands of fellow homeowners have been thinking refis, rate reductions, cash-outs and money-saving debt consolidations.

For the past two weeks, they've been bombarding lenders with applications for mortgage refinancing — driven by the most attractive rates in the marketplace in more than a year. Refinancings were up in mid-December by 60 percent over the same period last year, and they accounted for more than half of all home mortgage applications — the highest since spring 2004. Thirty-year fixed-rate loans slipped below 6 percent two weeks ago, and although they've rebounded slightly, they are still nearly a percentage point below where they were over the summer.

Fifteen-year fixed-rate loans in the mid-to-upper 5 percent range are readily available to applicants with solid credit.

Could a holiday-season refi be in the cards for you? Maybe, but it probably depends on whether you fit into one of several categories where today's rates make a lot of sense:

• You've got an adjustable-rate mortgage that's facing a "reset" into higher payments in the six months ahead. Your loan might be a payment-option mortgage, an interest-only mortgage originated in 2003 or 2004 with a three-year reset, or simply an ARM tied to short-term Treasury rates that's already costing you more than the fixed-rate alternatives.

• You've got a "piggyback" first- and second-mortgage package that was originally intended to let you purchase your house with a minimal or zero down payment while avoiding mortgage insurance premiums. But now the floating-rate second is above 8 percent and you want to bail.

• You need cash for a home- improvement project, a business investment or to buy a vacation home that's now available at a bargain price. Even though the fixed rate on your first is below 6 percent, the opportunity to cash out thousands of dollars and refinance into a larger replacement first mortgage is compelling.

So many current homeowners fit into these categories that Anthony Hsieh, president of LendingTree.com, predicts that this month's refi boomlet could stretch into 2007 — provided, of course, that rates remain close to 6 percent.

"This [boom] has legs," he said. "This is no head fake — it's for real."

For example, Douglas Duncan, chief economist for the Mortgage Bankers Association of America, estimates that $1.1 trillion to $1.7 trillion of adjustable-rate mortgages are scheduled for payment resets in the coming 12 months and that $600 billion to $700 billion is likely to be refinanced by homeowners eager to avoid higher monthly outlays.

Some loans are "nontraditional" mortgages that combine low initial payment periods with drastically higher payments after several years. For thousands of those borrowers facing big payment jumps, a refi into a fixed-rate mortgage is a no-brainer, Duncan said.

Other people who purchased during the housing boom using popular "3/1" adjustables in the mid-4 percent range for the initial three years now face significantly higher payments because short-term interest rates are much higher.

Consider this example from LendingTree: Say you bought your house in late 2003 with a $200,000 "3/1" adjustable at 4.375 percent with a margin of 3.75 percent and a 20 percent down payment. Your principal and interest payments have been $998.57 for the first three years. But now you face a reset into a 7.53 percent rate on your $197,000 balance — and a monthly payment increase of $383.

Your heads-up alternative: Refinance into a new 30-year fixed-rate $197,000 mortgage at 6.1 percent. Sure, your payment will be $196 higher than it is at your 4.375 percent rate, but not what you'd pay if you stuck with your current loan and its new rate.

Here's another scenario: Say you've got a great rate on the $200,000 first mortgage that you took out in 2002 — 5.5 percent. But you need $25,000 cash for remodeling or a business investment. On the one hand, you hate to get rid of a once-in-a-lifetime 5.5 percent rate. On the other hand, you have the opportunity to pull out the $25,000 with a refi, add it to the $192,500 balance on your current loan, and walk away with a new $217,500 replacement mortgage at 6.1 percent fixed for 30 years.

Your new monthly payment: About $184 more.

A gift from Santa? Hardly. Cash-out refis cost money. But your 6.1 percent fixed rate — not far above 40-year record lows — should still look good years from now.

Kenneth R. Harney: kenharney@earthlink.net
Copyright © 2006 The Seattle Times Company