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Rates are low; is it the time to refinance?

Most people are aware of the historically low interest rates currently available on mortgage loans. This past week, the Federal Reserve lowered the federal funds rate by .75 percent to the lowest level ever. While this rate is not directly linked to mortgage interest rates, the rates on mortgages did respond. Borrowers can lock in interest rates as low as 4.75 percent for a 30-year fixed loan.

Periodically, borrowers should evaluate their mortgage terms to determine whether refinancing would be economically wise. What data are needed to accurately decide?

The information includes your current mortgage rate and term, expected length of loan, current home type and estimated value, escrow information for taxes and insurance, and personal data (credit, income, assets). Your mortgage professional needs this information to supply a written good faith estimate and truth in lending statement with proposed interest rate, closing costs if the loan was refinanced, and the actual APR including interest rate and all fees. Many lenders will offer rates that apply only to the best customers and then reveal increases in rates and fees after underwriting. This reinforces the need to provide complete information and to deal with trustworthy sources to avoid hidden, unpleasant surprises. Remember, until you receive a written notice that your rate is locked with a lender, then the good faith and truth in lending statement is just an estimate and the data can change at any time.

Once you have accurate rate and cost information, the next step is to establish the break-even period, the time it takes the interest savings to cover the closing cost associated with the new loan. The greater the difference between the proposed and current interest rates, the shorter the break-even point. In contrast, the higher the closing costs, the longer the break-even point. The rule of thumb that has inaccurately been used for a long time is to take the costs associated with the new mortgage divided by the monthly interest savings. This would be correct only if the terms were exactly the same, an extremely unlikely event. The accurate method takes into account the term difference and provides the exact amount of monthly payments to break-even.

Contact your mortgage professional or enter the information into a financial calculator to find the true break-even period. Your mortgage professional will need all the information listed above to provide accurate figures. When you have determined the true break-even period and if you fully anticipate keeping your home past that time, you should profit from a refinance.

Brian McMahon, is a licensed mortgage broker with more than 14 years of experience. He can be reached at 794-5541.