costs usually are 2% to 3% of the loan balance, according to Gumbinger.) Suppose you’ll cut your payments by $1,600 annually. In three years, you’ll have saved $4,800: $1,600 times three. So this refinancing makes sense if you plan to stay in your house for three years or longer. “Typically, refinancing will be a good move if you lower your interest rate by at least a full percentage point and you plan to stay in the house for a few years,” says Gumbinger.
If you have a jumbo mortgage, a new federal law may offer a cost-cutting opportunity. If your home loan is for more than $417,000, you may have what is known as a jumbo loan. Rates on jumbo loans are much higher than rates on smaller loans, known as “conforming” loans, because borrowers meet guidelines from Fannie Mae and Freddie Mac. The reasons for this spread are complicated, but the bottom line is that investors who buy mortgages have stronger guarantees with conforming loans so they’re willing to accept lower yields.
As a result, borrowers pay lower rates for conforming loans. While 30-year conforming mortgages now average close to 6%, 30-year jumbo loans average about 7%. Under a new law, though, the ceiling on conforming loans has been raised in certain areas, through the end of 2008. Mainly in parts of the Northeast and California, the Federal Housing Administration can insure much larger loans. Fannie Mae and Freddie Mac will be allowed to purchase those larger loans, delivering an implicit federal guarantee to investors.
In Los Angeles and San Francisco counties, for example, mortgages up to a maximum of $729,250 will be considered conforming loans, eligible for federal guarantees. Those guarantees may knock down the costs of some new loans larger than $417,000, making refinancing a jumbo cost-cutter.
10 REFINANCING MISTAKES TO AVOID
- Ignoring a possible prepayment penalty Not doing a break-even analysis
- Not choosing the correct loan — fixed-rate, ARM, etc.
- Signing documents without reading them completely
- Failing to shop around for a lender
- Borrowing too much
- Refinancing too often
- Not getting a written estimate of closing costs
- Acting under pressure; be willing to walk away from surprises
- Failing to lock in an interest rate