Kofke refinanced his mortgage twice in the past three years, switching from a 30-year fixed-rate mortgage at 6.5 percent to a 20-year mortgage at 5.5 percent in the spring of 2008 and eventually to a 15-year loan with a 4.5 percent interest rate in the spring of 2009. That's a 55% decrease in his mortgage rate.
"We have to pay an additional $10 a month compared to the 20-year loan but will have our house paid-off four years earlier," Kofke explains. Our main goal is to be completely debt-free as soon as possible."
He's not alone. Low interest rates are spurring a boom in mortgage refinancing as homeowners look to lower their mortgage payments to help reduce their monthly expenses. According to a recent Freddie Mac report, most borrowers who are refinancing in the face of stupendous rate drops are opting for shorter-term, fixed-rate loans.
Essentially, homeowners are increasingly betting that interest rates will soon rise.
Home loan refinancing activity jumped more than 17 percent in the week ending August 13, compared with the previous week, to reach its highest level in 15 months, according to the Mortgage Bankers Association's Refinance Index.
"We are on the verge of another mini refinance boom," says Richard J. Martin, senior vice president at DE Capital, a joint venture between Wells Fargo and broker Prudential Douglas Elliman. Martin expects low rates to last through the fall, a time when interest rates are historically favorable.
Refinancing applications made up more than 81 percent of mortgage activity during the week, compared with about 79 percent in the week ending July 16 -- the last time an interest rate drop spurred a significant jump in refinance applications, leading to the highest refinance level since May 2009.
"Average interest rates on 30-year and 15-year fixed-rate mortgage loans fell pretty consistently through the latter half of the [second] quarter, hitting 50-year lows in June," said Freddie Mac's chief economist, Frank Nothaft.
A 15-year fixed-rate mortgage hit a record low of 3.90 percent in the week ending Aug. 19, 2010, down from 3.92 percent the prior week, according to Freddie Mac. A 15-year FRM averaged 4.56 percent a year ago.
A 30-year fixed-rate mortgage averaged 4.42 percent, down from 4.44 percent last week and 5.12 percent a year ago, Freddie Mac reported.
Fixed-rate loans accounted for more than 95 percent of refinance loans, as a vast majority of homeowners opted to steer clear of adjustable-rate mortgage uncertainty, Freddie said.
And lower interest rates mean lower monthly payments, and the best time for borrowers to refinance a mortgage is when interest rates have fallen and credit scores have improved, advises the Federal Reserve Board.
"In general, the refi boom has been under way for about the past three months," says Jay Dacey, a Twin Cities mortgage broker in Minnesota, "and everyone should talk with a mortgage broker to see if they have any [refinancing] options."
More than 30% of homeowners with a mortgage can benefit from refinancing, says Jim Sahnger, a Palm Beach, Fla. mortgage consultant. "Many can also refinance, even if the value of their home falls below what they owe," he adds.
Yet some of those who would benefit most from refinancing aren't taking advantage of the opportunity presented by low rates. Tighter lending conditions and tougher credit score requirements prevent many homeowners from being qualified to refinance.
In addition, some homeowners just aren't keeping track of changing interest rates.
"It's surprising how many homeowners just make their mortgage payments every month, without checking their current rate and looking into the benefits of a refinance," says Drew Saygit, a mortgage expert at First Michigan Bank in Troy, Mich. "They could be saving thousands more per year if they were more proactive. At the very worst, this money could be going to pay off their homes faster."
Those who are considering a refi will have to decide whether it's worth the fees, however.
It is not unusual to pay 3 percent to 6 percent of your outstanding principal in refinancing fees, according to the Federal Reserve Board. That includes fees for loan origination paid to your lender or broker, homeowners insurance, as well as application, appraisal, inspection, closing and other fees.
So if you're planning to move in the next couple of years, refinancing may not be your best bet, according to the Fed.
And generally, refinancing for the sake of lower monthly payments alone isn't a good idea, says David Colgren, spokesman for the California Society of CPAs. "Getting lower monthly payments alone due to financial difficulties, when interest rates are rising: Your cash flow might be better, but in the long run you'll be paying more in interest."
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