Rates are down, but refinancing not best for all

With mortgage interest rates dipping as low as 4.75 percent on Wednesday, Tampa Bay area homeowners should be clamoring to refinance with some of the cheapest home loans in generations.

Or should they?

Thanks to a 30 percent drop in home values since 2006, local bankers and mortgage brokers are preaching the virtues of home refinancing to a smaller choir of homeowners than they were just two years ago.

Borrowers with stellar credit and hefty home equity should find savings galore, but for the tens of thousands of homeowners who bought in the boom market of 2004-2007, refinancing could prove costly and pointless.

"I'd probably tell more people in this market not to refinance,'' said Kerri McDougald, broker-owner with Brandon's All Mortgage Group. "Most people right now are upside-down on their mortgages or the cost of refinancing is not effective for them."

To be sure, if you've owned your house at least five years, accumulated equity and won't move in the next year or two, you can save thousands of dollars a year.

On Tuesday, the Federal Reserve cut the rate it charges banks to between zero and a quarter percentage point, the greatest loosening of credit since the Great Depression.

Trimming your mortgage from 7 percent to 5 percent on a $200,000 loan would save you about $3,000 a year. Even accounting for fees and commissions associated with refinancing, you'd come out ahead in a year or two.

"For people in a decent equity position who have paid on time the rates are extraordinary,'' said Rim Karnavicious, mortgage specialist at First State Bank in St. Petersburg. "All the people who refinanced in the 6 to 7 percent range the last few years, should really look at refinancing again."

But the plunge in housing values has priced thousands out of the refinancing market, regardless of their credit score. Nearly half of Tampa Bay area homeowners who bought in the last five years owe more on their mortgages than their homes are worth, according to the real estate valuation company Zillow.com.

It's even worse for people who bought in the peak price year of 2006. About 70 percent of them have negative equity in their homes. If they wanted to refinance, many of those homeowners would have to bring tens of thousands of dollars in cash to the closing table to compensate for the real estate depreciation. Without at least 20 percent in equity, bankers often require private mortgage insurance, which could add at least another $100 to the monthly payment.

"The house has to qualify as much as the borrower," said Don Ward, compliance manager at Clearwater's All State Mortgage and Loan Corp.

Even homeowners with solid equity but small loan balances might find it worth their while to skip refinancing. It could take years to work off the closing costs for such a small loan.

"I can drop some people two points on some loans, and it will save them only 30 bucks a month," said Rick Kelly, owner of Bay to Bay Lending in Tampa's Hyde Park.

To combat the recession, the Fed promised this week to keep rates "exceptionally" low for a while.

Whether that will be enough to help most Tampa area homeowners remains to be seen. Mortgage brokers said phone volume swells whenever banks cut rates. But as often as not, they have to turn down those potential borrowers. They simply don't qualify in an era when customers can no longer fudge incomes on loan applications.

"This rate cut is not going to address the biggest thing, which is lack of equity,'' McDougald said. "'Everybody's afraid to spend right now. They don't even know if they're going to have a job next month.''

When does it make sense to refinance?

Depends on how much you owe on your house, what rate you're paying and how long you plan to stay at that address. Here's three case studies of homeowners we'll assume have good credit and qualify for today's 5 percent rate for a 30-year fixed mortgage:

CASE STUDY A: You bought a house at the peak of the market in 2006 for $300,000 and still owe $270,000 at 6.5 percent interest. Answer: Doesn't make sense. A 5 percent loan would save you $3,084 a year. But a home worth $300,000 in 2006 is worth on average only $220,000 today. You'd have to cover out of pocket the $50,000 difference between your old loan amount and today's home value.

CASE STUDY B: You bought a house in early 1999 and owe $70,000 at 7.5 percent interest. You plan to move in one to three years. Answer: Might make sense. Your house has risen in value since 1999, and a 5 percent loan would save you $1,364 per year. But beware of closing costs. Fees and commissions on the refinance can easily cost $3,000. If you're moving in a year, you won't recoup the money. But if you won't move for three years, you'll probably save money.

CASE STUDY C: You bought a house for $200,000 in 2003. You still owe $195,000 on an adjustable rate mortgage that's resetting to 8 percent. Answer: Makes sense. The new 5 percent rate would save you $384 per month, or $4,600 per year. Even accounting for closing costs, you'll have saved more than $20,000 in five years. Since home values are still up modestly since 2003, chances are you won't need to bring any cash to the table.

Rates are down, but refinancing not best for all 12/17/08 [Last modified: Thursday, December 18, 2008 2:40pm]

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