Home loan interest rates continue to bounce along at their historical bottoms, yet millions of American home owners who should refinance to these lower rates have not done so, and it's literally costing them money every day that they wait.
Most experts believe long-term rates will head higher, so what's stopping the refinancing wave?
Here are some of the most frequently asked questions I receive:
Q: Why is now the right time to refinance?
A: Because rates may never be this low again in our lifetimes. Thirty-year fixed rates are right around 4.0 percent, 15-year loans are around 3.25 percent, and 7/1 adjustable loans are actually below 3 percent.
Q: So who should consider refinancing?
A: Anyone owing at least $50,000 with an interest rate of anything at 4.5 percent or above. In addition, this is a great time to consolidate debt from things like cars and credit cards into low-rate mortgage debt.
A: Can you give me an example?
Sure. We are seeing a lot of borrowers with about 20 years left on their loan at about 5.5 percent or higher. If they plan to stay forever, they can move to a 15-year fixed rate and see their payments stay about the same, but their loan is paid off seven years early. That's perfect for someone looking to retire in about 15 years.
Q: Who else might benefit?
A: Well, if that same person planned on moving in about seven or eight years, maybe for a retirement relocation, they could refinance now and choose a 7/1 ARM.
In that program, the rate is fixed for the first seven years at a super low rate, but after seven years, the loan becomes adjustable, and the rate changes annually with the market.
The good news is that if you plan to sell then, you got the benefit of the seven-year rate lock but not the risk of higher rates.
Q: Any other scenarios I need to know about?
A: Let's say we have a couple approaching retirement who plan to pay off their loan in the next 10-12 years. Their current rate is anything above 4.5 percent. Depending on their loan amount, they could refinance with a 7/1 ARM, maintain their old payment, and likely have the whole loan balance paid off at the end of seven years. That means they get to retire perhaps five years ahead of schedule.
Q: But don't the closing costs offset the rate benefits?
A: All refinance loans cost someone money. There is no such thing as a "cost-free" loan closing. But there is a way to get someone else to pay for it.
If you are willing to accept a slightly higher interest rate on your loan, the lender will make a "premium" when he sells your loan. That premium can then be used to cover your closing costs.
Depending on how much you borrow, you might be talking about half to three-quarters of a percentage point added to your loan. So a 15-year fixed rate that normally carries a rate of 3.25 percent with 2.5 percent closing costs might move to 4 percent with zero closing costs.
Q: Is that the only way to beat closing expenses?
A: If you truly want to get the lowest rate possible and don't want to pay closing costs now, you can sometimes have these fees added to the amount you are refinancing, then use them to pay for your own closing.
Effectively, you have borrowed your own closing costs, but it allowed you to retain the lowest possible interest rate.
Q: So the advice to refinance applies to everyone?
A: Because everyone has a unique situation, it's not possible to review every possible scenario here, so I always advise you talk with your CPA. But don't delay.
Trust me when I say this: If you owe more than $50,000 and your interest rate is anything above 4.5 percent, you should run to the nearest phone and call a reputable local lender right now.
Q: How long will these rates last?
A: In my opinion, these rates are not sustainable, regardless of what Ben Bernanke says or does. Long-term interest rates will move higher. My crystal ball gets cloudy when I try to predict when that will occur.
If you refinance now, you will see your savings add up month after month for as long as have that loan. Don't wait for rates to get better.
If they do, you can refinance again. But if they don't, you will be doubly glad you acted now!
My bottom line advice: Lock in these rates for as much as you can and for as long as you can right now. If your current loan has less than 20 years remaining, refinance now with a 15-year program.
Remember that revolving debt like credit cards is almost always at a variable rate, so pay them off now with fixed-rate debt like mortgages.
John Adams is an author, broadcaster and investor. He answers real estate questions submitted through his website and in this column. For more real estate information or to make a comment, visit www.money99.com.
