Low mortgage rates are still knocking at your door

There are signs that the recession may be easing. A recent survey found that, of 45 professional forecasters, 75% expect the economic downturn to end by the third quarter of this year.¹ Other signs are not so positive, including rising prices for oil, gas and other commodities. Mortgage interest rates are following suit, recently hitting a seven-month high of 5.59% for a 30-year loan.² Still, today's rates remain historically competitive...for now. So if you plan to refinance, you may want to act soon.

Why refinance?

There are several reasons refinancing may make sense for you:

• A lower interest rate could translate to monthly savings and a reduced overall cost for your home. The best reason to refinance is to lower your monthly mortgage payment. In the first quarter of 2009, half of all homeowners who refinanced their mortgages lowered their annual mortgage rate by at least 20%, according to Freddie Mac.³

  What's more, refinancing can reduce the overall cost of your home by significantly reducing your interest charges. For example, if you have a $300,000 30-year mortgage at 7%, you'll pay $418,527 in interest throughout the life of the loan. The same loan at 5.59% will cost $319,324 in interest charges — a savings of nearly $100,000.

• Refinancing to a shorter term could save you thousands in interest costs. If you can afford the higher monthly payments associated with a shorter-term loan, you'll save thousands of dollars in interest charges throughout the life of the loan. For example, the average 15-year mortgage rate was 5.06% as of June 11, 2009, according to Freddie Mac.⁴ A $300,000 loan on these terms would result in $128,718 in interest charges, compared with $319,324 in interest charges for a 30-year loan at 5.59%. That's a savings of more than $190,000.

• You can consolidate debt at an attractive interest rate. If you have a healthy amount of equity in your home, you may want to consider consolidating other higher-interest debt, including credit card balances and auto and personal loans, into your refinanced mortgage loan.

  Today's mortgage rates are lower than rates on most other types of debt, offering the potential to save significantly on interest charges. Plus, unlike the interest on consumer loans, the interest you pay on your mortgage loan is usually tax-deductible up to the principal amount remaining on the mortgage. Any additional home equity loan amount — up to the lesser of $100,000 or the equity in the home — is deductible for regular tax but not for alternative minimum tax purposes.

Knowing when the time is right

Most mortgage experts suggest refinancing when you can get an interest rate that's at least one point lower than your current rate. But what really matters is how long it will take you to break even and whether you plan to stay in your home that long. In other words, make sure you understand — and are comfortable with — the amount of time it will take for your overall savings to compensate for the cost of the refinancing.

Consider this: If you have a $300,000 30-year mortgage with a 7% interest rate, your monthly principal and interest payment is around $1,996. If you refinance at 5.59%, your new monthly payment will be $1,720, a savings of $276 per month. Assuming new closing costs total $2,000, it would take approximately seven months to break even ($2,000 ÷ $226 = 7.25). Therefore, if you plan to stay in your home for at least seven more months, refinancing makes sense.

Owe more than your home's worth?

Today's housing market is a mixed bag. Mortgage rates are historically low, yet home values have plunged. In some areas of the country, home values have declined by as much as 50% from their peaks, according to the S&P/Case-Shiller Home Price Indices.⁵ As such, some homeowners may be unable to take advantage of current low mortgage rates because they now owe more than what their homes are worth.

Homeowners in this situation are seeing assistance from the federal government's Making Home Affordable refinance program. You may be eligible if your new loan does not exceed 105% of the current market value of the property. For example, if your property is worth $300,000 but you owe $315,000 or less on your first mortgage, you may qualify. Visit makinghomeaffordable.gov to read the full program details.

Points to remember

For many homeowners, today's historically low mortgage rates offer a real opportunity to boost monthly income and save considerable money over the long term. As you evaluate the current mortgage market, keep these points in mind:

• Refinance only if the long-term savings outweigh the initial expenses. To calculate your break-even point, divide the cost of refinancing by your monthly savings. That’s the number of months you'll need to stay in the home to make the strategy work.
• Look beyond the interest rate to the other components of the loan. The interest rate is important, but you need to consider all of the terms to make an informed decision. Obtain a good faith estimate from every lender you’re considering and thoroughly review the terms. Then compare the lenders’ quotes and fees so you can select the most appropriate option.
• See your tax advisor to discuss the tax implications of the refinance.

It's important to stay on top of the ever-changing mortgage market. Talk to your financial advisor, who can help you determine if and when refinancing makes sense for you. Your advisor also has access to a range of mortgage and lending solutions through Ameriprise Bank.