Time to refi?

In "Time to think about a mortgage refi -- if you've got equity" at the L.A. Times' Money & Co. blog, Tom Petruno talks to Keith Gumbinger, vice president of the mortgage research firm HSH Associates in Butler, N.J., about dropping interest rates:

The average rate on 30-year conforming mortgages tracked by HSH was 5.30% today, down from 5.57% a week ago.

Some mortgage brokers are quoting rates below 5%.

"Borrowers who are at 6% or above should at least be considering" refinancing, Gumbinger said.

Of course refinancing won't work for everyone:

Not surprisingly, there are two big potential hitches for many homeowners hoping to refi: their creditworthiness and the amount of equity in their home.

For more on how your situation stacks up, see the full post.

Also dropping have been the interest rates on home equity lines of credit. A colleague of mine is wondering if he should just pay off his 15-year 5.4% interest rate mortgage, which has about eight years to go, using his HELOC. The HELOC rate is .75 below prime for the life of the loan, which means he's paying in the 3.5%  range now. Is it worth taking the risk that rates won't skyrocket?

Hello, Mr. Gumbinger?

--Lauren Beale

Thoughts? Comments?

Photos: A Christmas tree outside the New York Stock Exchange in New York City. Stocks rallied Tuesday after the Federal Reserve cut interest rates to a historic low and promised to use "all available tools" to stabilize the financial system.

Credit: Jason Szenes /European Press Agency

Comments

[Keith Gumbinger, VP]

Hello Lauren, and thanks for the chance to comment.

Replacing fixed-rate certainty with variable rate uncertainty requires careful consideration. Without knowing more details about your colleague's situation, it's hard to make any absolute recommendations.
Presumably, there is enough equity in the home to cover the full amount due for the first mortgage... and the lender holding the HELOC is willing to extend that much new credit?

It's true that rates are extraordinarily low at the moment, but that won't be the case forever, and even a small lift in short-term rates -- the Fed takes back just half of its recent downward shift, for example -- and the HELOC's interest rate will be above the existing fixed rate (and perhaps poised to go higher).

Record-low short-term interest rates with only one direction to go (up!) was at least a contributing factor to the housing mess in which we presently find ourselves... and even if such a lift in rates doesn't cause that level of duress, it could certainly wipe out any benefit of having made the change.

Also, don't be too certain that your co-worker's new rate will fall all the way down to the very bottom. Many HELOCs have interest rate "floors" which limit how low rates can actually go for these products. He should pull out his loan contract or disclosure and read it carefully to see if this is the case.

With only eight years left on a 15-year fixed rate, he's already paid about two thirds of all the interest due on his loan (readers can run their own calculations at http://www.hsh.com/calculators.html to see how far along in their amortization they already are). This means that interest savings may be limited, even if rates don't rise in the future _and_ he sticks to finishing the loan in the actual remaining eight-year time frame. If those new HELOC payments are stretched over a longer period -- ten years instead of eight, for example -- the interest savings are reduced further.

All that said, and risks being what they are, it is technically possible to achieve some savings when making a change such as the above. However, it does require some additional diligence on the part of the borrower and probably some discipline as well -- and likely more than just a little luck that interest rates remain favorable for a long enough period of time to produce measurable savings.

Keith T. Gumbinger
Vice President
HSH Associates