rates hit record lows; can it be time to refinance again?

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rates hit record lows; can it be time to refinance again?

Mortgage rates have dropped to their lowest since 1967, which is expected to result in another rush to refinance.

The benchmark 30-year fixed-rate mortgage fell 20 basis points to 6.34 percent on July 25, according to Bankrate.com's weekly national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in the survey had an average total of 0.48 discount and origination points. That's the lowest 30-year mortgage rate since Elvis and Priscilla exchanged vows in the Aladdin Hotel in Las Vegas on May 1, 1967. That month, the average rate on a 30-year FHA mortgage was 6.29 percent, according to the U.S. Department of Housing and Urban Development.

It is the lowest 30-year rate that Bankrate.com has compiled since it began tracking mortgage rates in 1985. Previously, the lowest average 30-year rate tracked by Bankrate.com was 6.42 percent the week of Nov. 7 last year.

Mortgage rates continue to drop because the stock market has done the same. The steep drop-off in stock prices has made U.S. Treasury notes more attractive to investors. As demand for Treasuries rises, so do their prices. Treasury notes are like teeter-totters: When one end goes up, the other end goes down. In this case, Treasury prices rise, so their yields fall.

Mortgage rates tend to move in the same direction as Treasury yields, which have dropped below 4.5 percent for 10-year notes They hadn't been that low since mid-November, when the economy was still in a recession.

Homeowners have responded to the low rates by rushing to refinance their loans. The week of July 14 was the busiest week in mortgage offices since November, and 61.2 percent of mortgage applications came from current homeowners who wanted to refinance their loans, according to the Mortgage Bankers Association.

"While the refi boom had softened earlier this year, low interest rates the last five weeks have rekindled a stronger refinance wave not seen since last year," says MBA economist Phil Colling. "At the current record low mortgage rates, it is possible that some people who had refinanced earlier at a higher rate are now refinancing again."

It pays to be a serial refinancer if you stay in your home for several years. Here's an example:

Let's say you got a 0,000 mortgage at 8 percent in December 1999, and you refinanced at 7 percent in August 2001. By doing so, you slashed the monthly mortgage payment by almost 3. If your closing costs were ,000, you break even in about 2 1/2 years (that's how long it would take the monthly savings to add up to ,000).

You watched in chagrin as rates plunged in November because you didn't want to refinance again so soon. This time around, you grab your opportunity and refinance at 6.375 percent because you found a great mortgage deal with your current lender. That decreases your monthly payment another . It's been less than a year since you refinanced, so your lender uses last August's property appraisal and your closing costs are ,500.

At this point, you've shelled out ,500 in closing costs on two refinances. You've already saved ,200 in monthly mortgage payments from August 2001 to this July because of your first refinance, so you need to recoup another ,300 in closing costs. You're paying 5 a month less than your first mortgage, and it will take you another 26 months to break even. By then, you will have owned the house for almost five years.

The old rule of thumb used to say that you shouldn't refinance until the current mortgage rate is 2 percentage points less than your original rate. As the above example shows, it's more complicated than that. The decision whether to refinance depends upon how much the rate drops, how much you pay in closing costs and how long you plan to remain in the house.

There's another tactic you could pursue -- replacing a 30-year loan with a 15-year mortgage. In the above example, if you were paying down a 0,000, 30-year mortgage at 7 percent and refinanced for 15 years at 6 percent, the monthly payment would increase by 7 a month (principal and interest would go from 7.95 a month to ,265.79 a month).

In exchange for that higher payment, you would build equity more quickly, and you would pay much less interest over the life of the loan. Total interest on the 30-year loan would add up to more than 9,000, while total interest on the 15-year loan would add up to less than ,000.