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Now could be the time to refinance

Call it a miniboom: Thousands of homeowners across the country early this fall have been looking at their monthly mortgage payments and deciding to get rid of their old loan and shop for a new one.

According to new data from the Mortgage Bankers Association of America, one out of every three homeowners with a mortgage is a refinancing candidate this fall. Between 35 percent and 40 percent of all new loan applications in October were for refinancings, a percentage harking back to the early months of the big "refi" boom of 1992-1993.

Who is a refi candidate? You may be if you fit into any of these descriptions:

+ You have a fixed-rate mortgage rate of 8{ percent or higher. Homeowners nationwide have about $800-billion worth of mortgages in that range, according to MBA chief economist David Lereah.

+ You had credit problems the last time you took out a mortgage, but your repayment performance on all your debts over the last year or two has been excellent. As a result, your current B or C mortgage could be replaced with an A or A-minus at a rate close to 7{ percent.

+ You have an adjustable-rate loan tied to one-year Treasury bills that is heading for its periodic adjustment during the next several months. Since many adjustable-rate borrowers try to catch the market at a cyclical low point and convert to a fixed-rate loan, the numbers may pencil out for you this fall.

Lereah insists he is not anticipating a refi boom of 1992-93 proportions, but he has looked at rates on the roughly $3.9-trillion worth of outstanding home loans sitting in the marketplace and concluded that about one-third of all homeowners are now potential refi candidates.

If 30-year fixed rates, now hovering between 7.3 percent and 7.5 percent, flutter down even more, said Lereah, "we could see a lot more (refi) activity." Even with no further drop in rates, the sheer size of the refi candidate segment of the mortgage market could produce significant new loan applications before the end of the year.

Part of what is propelling the miniboom is the increase in loan alternatives that make refinancing attractive. One of the important recent innovations, for example, is the willingness of many mortgage brokers to offer no-fee refi packages. The borrower pays no points and little or none of the usual closing expenses. The rate is slightly higher than the very best rate the broker can obtain but substantially lower than the rate on the borrower's existing loan.

A typical no-fee refi of a homeowner with a two- or three-year-old adjustable-rate mortgage tied to one-year Treasury bills might look like this: The borrower's next rate adjustment, scheduled for December 1997, is likely to move her rate up to nearly 8{ percent, according to Keith Gumbinger, vice president of HSH Associates, a New Jersey-based national research service that tracks rates weekly at more than 3,000 banks and mortgage companies.

Most no-fee, no-point 30-year fixed-rate refi packages, by contrast, according to Gumbinger, are now in the 7.8 percent to 8 percent range. For no out-of-pocket cost, borrowers can simply slip into a new fixed-rate loan at a lower rate than their adjustable.

Refinancing "is a no-brainer in a situation like this," says Gumbinger.

Other options for refi shoppers in the November marketplace:

Discount "hybrid" adjustables that offer a fixed rate for an initial term of the loan, then convert to one-year adjustables for the balance of a 30-year term. The average "7-1" hybrid nationwide, according to Gumbinger, currently goes for 7.1 percent. That rate stays fixed for the first seven years then converts to a one-year adjustable rate.

Even more attractive are "5-1" hybrids at an average rate nationwide of 6.94 percent.

Since many homeowners, especially young, first-timers, have purchased homes in the past few years with one-year adjustables, the opportunity to shift to a rate of 6.94 percent for the next five years can be very compelling. This is particularly true, says Gumbinger, "if you know you're likely to move before the five years is up," and you negotiate fees with your mortgage company to the minimum.

Are rates at a cyclical low? No one knows that answer, but it is worthwhile to look back at rate movements earlier in this decade. Though 30-year mortgage rates hit their 28-year low of 6.93 percent in October 1993, they swung back sharply during the following year, hitting 9.41 percent by the end of 1994.

The bottom line is, if you can cut monthly costs by refinancing now, don't wait for still lower rates. They may not be in the cards.

Washington Post Writers Group