Refinancing [mortgagegoalrates.blogspot.com]
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With mortgage rates falling to record lows this summer and the housing market showing signs of a pulse, refinancing activity is perking up. It's too bad that so many people are relying on oversimplified advice and bad numbers to decide when to pull the trigger. The refinancing equation has never been more complicated. While some borrowers are desperate to reduce their monthly payments, others are looking to build equity. Some are even treating their mortgage as an investment vehicle, sinking excess cash into their homes in order to secure a lower rate and cut future payments. Yet most personal-finance resources these days don't account for situations like these. Even essential factors like tax rates and inflation expectations are often ignored in favor of simplistic calculations. Many popular Web resources, in fact, are financed by lenders, mortgage brokers or "lead generators" that connect borrowers with banks.
At times, their advice can be downright harmful. That's b ecause of the risk involved. Refinancing generally costs 3% to as much as 6% of the outstanding principal of the loan, with banks levying fees on everything from application fees and title searches to appraisal costs and legal expenses. (Mortgage "points" can add to the total, though they typically help reduce the interest rate and lower overall costs.) Fees are often murky, too, making comparison shopping difficult. The best way to compare deals is to consult with a housing-counseling agency approved by the U.S. Department of Housing and Urban Development. Given such costs, you don't want to refinance often. Yet the advice coming from the mortgage world suggests you should be doing it regularly. One particularly dubious idea gaining prominence is the "1% rule," which used to be the 2% rule when rates were higher. The gist: Refinance when you can knock a full percentage point off your rate. A lead-generation site called Supermortgages.com says the following in a piece called "When to Refinance a Mortgage": "Are the current mortgage interest rates at least 1 point less than your existing mortgage interest? If so, refinancing your home mortgage might make sense." Wells Fargo & Co.'s website goes further. In an advice article titled "Deciding to Refinance," it writes: "If interest rates are 1/2% to 5/8% lower than your current interest rate, it may be a good time to consider a refinance." Yet people who followed the one-point rule could have refinanced five or six times in the last 15 years, paying so much in fees that the savings would likely be wiped out. Supermortgage content largely comes from mortgage brokers, lenders and other industry sources, says Andy Shane, a spokesman for parent company SuperMedia Inc. In this case, he says, the author is a freelance writer with a law degree and a background in real estate who used a mortgage calculator and determined that a one- to two-point cut in rates "made a pretty significant difference in mon thly payments" compared with closing costs. Wells Fargo spokesman Jason Menke says the bank's website has a wide range of information available to help borrowers. "The rate difference cited is just a point where a borrower may want to consider looking into a refinance," he says. The 1% rule could translate into big business if it catches on. About 71% of outstanding fixed-rate mortgages guaranteed by Fannie Mae or other government-sponsored entities are at least a point above current rates, according to Walter Schmidt, senior vice president at FTN Financial Capital Markets in Chicago. Recommend Refinancing Topics
