Fixing the rate often refinancing’s goal

The rush to refinance mortgages comes in waves, as homeowners keep an eye on interest rates and try to take advantage of market fluctuations to improve their cash flow. In today’s real estate market, with stabilizing or dropping home values and a flood of foreclosures, many homeowners worry about whether refinancing is advisable or even possible.

Financial advisers and lenders say that deciding to refinance a mortgage loan should always be based on individual circumstances, weighing a variety of influential factors. Consumers and their lenders can spend time working on the equation that reveals not only an immediate change in monthly cash flow, but also the long-term financial implications of refinancing.

Michael Rebibo, a certified financial planner with 1st Portfolio Inc. in Vienna, says, “Refinancing can be good for homeowners if they can save money, but they need to understand that saving money is not just about current cash flow. Some people pile on additional debt when they refinance, and they haven’t actually saved anything.”

Mr. Rebibo says that the most important reason for homeowners to refinance now would be to move from an adjustable-rate loan to a fixed-rate loan, which he believes is the smart thing to do.

“It’s a risky bet to think that interest rates will come down further,” says Mr. Rebibo.

Mr. Rebibo says one of the considerations for consumers when choosing to refinance includes the amount of their current loan in relation to the current value of the home. In some areas, home values have dropped, so those homeowners have far less equity than they may have had a year or two ago.

“Lenders are much stricter than they were in the past, so usually in order to refinance you need to have at least an 80 percent loan to value,” says Mr. Rebibo.

Another consideration which influences a refinancing decision is the estimation by the homeowners of how long they intend to stay in the home.

“If you plan to stay in your home for a few years, it makes more sense to refinance than if you are only staying one more year,” says Rick Eul, assistant vice president and mortgage account executive with Bank of America in Annandale. “The problem is, most people don’t really know for certain how long they will stay in one home.”

Mr. Eul says consumers with adjustable-rate mortgages should be evaluating the merits of refinancing into a fixed-rate loan.

“I’ve had a lot of feelers from people with adjustable-rate loans, but some of them are rolling the dice and betting that long-term interest rates will go down,” says Mr. Eul. “People are weighing the closing costs of $2,000 or so versus keeping their current low interest rate and deciding there is no rush to jump into a fixed-rate loan.”

Mr. Eul says that some of the consumers who could benefit from refinancing are unable to qualify for a new loan because they do not have enough equity in their property.

“People with these one-month adjustable-rate mortgages (ARMs), interest-only, pick-your-own-payment kind of deals really should refinance, because they are often seeing negative amortization tacked onto the end of the loan,” says Mr. Eul.

A general rule of thumb for refinancing has often been for consumers to opt for a new mortgage when the interest rate drops at least 2 percentage points below their current loan. In today’s market, however, many consumers refinance for much less of a difference.

“I have some clients who will refinance in order to get from a 6.25 interest rate to a 6.00 interest rate,” says Steve Cohen, a personal mortgage consultant with National City Mortgage Co. in Wheaton.

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