Homeowners scurrying to refinance, cut debt, reduce mortgage

Raphael Levinore was able to buy a bigger house with a swimming pool.

Donna Helmka plans to install new windows in her home, pave her driveway and pay off about ,000 in debt.

Mortgage rates that are hitting their lowest levels since 1958 are fueling a lending boom. Refinancing accounted for almost 80 percent of mortgage applications last week, according to the Mortgage Bankers Association. People are signing new mortgages for homes or refinancing at a lower interest rate to cut monthly bills or make improvements.

For the past two years, mortgage rates have ticked downward.

The 30-year fixed-rate mort-gage (based on zero discount points) fell to just above 57/8 percent, according to Interest.com. Meanwhile the 15-year fixed-rate mortgage is holding at 53/8 percent (based on zero discount points).

"We are probably seeing the lowest mortgage rates since the mid-1960s," said David Berson, chief economist for Fannie Mae.

Why have rates dropped so low? For starters, there's low inflation and the economy is growing slowly, Berson said.

Companies are not borrowing money to build new factories or expand, he said. "Those dollars are available to you for your mortgage."

The flood of original mortgages and refinancings has increased the workload for banks, mortgage companies and other related services such as title searchers and appraisers.

For example, Wachovia Mortgage Co., which is affiliated with First Union bank, has hired 19 contract workers to process loans to help its 75 employees in the region that covers New Jersey, New York and Connecticut, said First Union spokeswoman Fran Durst.

Much of the work is for refinancing, which provides an opportunity to cut monthly payments or to tap into home equity to make improvements or pay debts, said Jim Brown, senior vice president of Select Mortgage Corp. in Neptune, N.J.

For instance, a 30-year 0,000 mortgage and a fixed rate of 71/4 percent would have a monthly payment of about ,365. Refinance with a 61/4 percent 30-year mortgage and the monthly payment drops to about ,232, a savings of 3 a month.

Replace the mortgage with a 15-year mortgage at a fixed rate of 6 percent and the mortgage payment increases to ,688. But the amount of interest you pay drops by 7,000, Brown said.

How do you know if its time to refinance? The rule of thumb used to be if rates dropped 2 percentage points. Now lenders say people are refinancing when rates have dropped 1 or 11/2 percentage points.

The important factor to keep in mind: How long will it take to recoup the costs. There are bank fees, including the application and appraisal costs. You'll need a closing agent, such as an attorney or a title company. Title insurance is another cost. If you're not going to stay in your home long enough to recoup those costs, then it might not be worth it to refinance.

If it is worth it to you, go to the lender of your current mortgage. "Ask them what it would take for them to essentially lower your rate," said James S. Vaccaro, chairman and chief executive officer of Monmouth Community Bancorp in Long Branch, N.J. Your lender might be willing to lower your rate in exchange for a fee and a small amount based on the loan balance to keep your business.

A verbal approval should come within two or three days of filing an application, Brown said.

Next comes the paperwork. Brown said you should supply your lender with a copy of the deed, a recent survey, homeowners' insurance policy, three recent pay stubs and three recent bank statements.

If you lock in your interest rate, expect a written agreement spelling out the length of the lock-in period, he said. "Verbal conversations can lead to misunderstandings," Brown said.

Helmka, 47, has owned her house in Wall, N.J., for about four years. She recently refinanced her 30-year, 1,000 mortgage, which had a 7.25 percent interest rate. Her new interest rate is 6.75 percent, and she borrowed another ,000 for home improvements and to pay off debts.

Her monthly mortgage payments will increase by about . But she said she will save about 0 each month by paying off her debts.

"I really just started thinking, 'I want to consolidate this debt. Maybe I should use some of the equity in the house,'" Helmka said. "It is definitely better for me."

Levinore wanted to buy a larger home more suitable for children. He replaced his 2-year-old, 9,000 mortgage with its 8.2 percent fixed rate with a 6.5 percent fixed-rate, 25-year, 5,000 mortgage.

The larger mortgage added only 0 to his monthly payment, bringing it up to ,900 a month, he said.

He and his wife also sold their former house for 0,000, taking advantage of the hot housing market.

"We were able to afford a more expensive house in a better area of town, which I think everyone is doing," said Levinore, 36, of Neptune, N.J.

Related links:

1. Rough seas of rates: It's sink or swim in rush to refinance mortgages
2. If you're considering refinancing, examine all the options
3. Low Interest vs. Refinance Option