Chance To Grab Mortgage At Low Interest May End Soon

Get your refinancing plans in order, fast. Although mortgage rates are still drifting downward, they're closer to the bottom than the top right now.

By catching the bottom of the downward cycle, you not only could shave your payment by $100 to $500 a month, but some homeowners could save $100,000 or more over the life of their loan.

Two reasons to move quickly:

-- Mortgage rates are at a 15-year low. Bank Rate Monitor's average 30-year fixed-rate has dropped to 8.16 percent, matching the numbers you saw back in 1977.

The average 15-year fixed-rate is down to 7.74 percent, and the first-year introductory rate on an adjustable-rate mortgage is 5.75 percent. Fixed rates ticked upward last week, but that doesn't mean they're headed up for good.

-- Many lenders are now being swamped by applications, like they were back in 1986 when the 30-year fell below 10 percent. Then the backlog became so heavy, that loan processing took up to three months.

No one knows exactly when rates will bottom out; the recession continues to drag all interest rates down. Typically during spring, when the weather warms and people scramble out of their hutches to shop for homes, rates tend to rise. All bets are off, of course, if the recession continues into summer.

The biggest problem is that the average Joe and Jane are confused as heck about the ABCs of refinancing. Which type of mortgage to get and for how long? Which deal is better, low rate/high points or high rate/low points?

Any way you look at it, refinancing is like giving yourself a raise. Here are the pros and cons of different deals and what to look for:

-- The two-point rule: Refinance when the current rate is at least 2 percentage points below what you're paying now and if you plan to stay in your home for another three years. It'll take you that long to recoup the refinancing costs.

-- 30-year vs. 15-year: In some cases, the payment on a 15-year rate on the new loan may be no more than that on your old 30-year, because rates have plummeted. Possible savings on a $100,000 loan: About $175,000 if you trade in your old 11 percent loan for 30 years for a 15-year loan with a rate of 7.75 percent.

ARMs are attractive: They're already under 5 percent in Dallas and Washington, D.C. Even if rates go up, the typical 2 percent annual and 6 percent life-of-loan caps on these loans would hold down your monthly payments for the next three to five years.

-- Refinancing costs: Usually 3 percent to 5 percent of the loan amount. You'll pay up-front fees, points and other costs at closing. Lenders charge what they can get away with, but you can wheel and deal. Some lenders may take less up front if you settle for a slightly higher rate.

-- Only the bottom line counts! Always add up up-front charges such as credit report and appraisal; finance rate; and closing costs including points when you shop. That's the only way to figure the cheapest deal.

-- Can you add points and closing costs into the loan? Yes, at some lenders, if the original appraisal value of your home has gone up and if you qualify for a higher payment.

-- What determines whether you qualify? The rule of thumb, besides credit history, is that principal and interest (P&I), taxes and insurance shouldn't be more than 28 percent of your monthly gross income. Your total debt including credit cards and other loans shouldn't be more than 33 percent.

-- Try to combine your existing home-equity loan and mortgage loan in the same refinancing package. A home-equity rate pegged to the bank's prime rate could go up later. With a 15-year or 30-year fixed-rate mortgage, your payment would be locked in.

-- What to do with the savings on your monthly payment: Invest the cash for a future expense, such as a child's education. Pay off your other, non-deductible debts, such as car loans and personal loans, faster. Apply the extra money to the principal on your new mortgage and shorten the term.

-- Tax implications. When you bought your home, you could deduct the points paid in the first year. When you refinance, you have to spread the points over the life of the loan; if you sell the home before the mortgage is paid off, you can deduct the remaining amount in the year of the transaction.

Robert Heady's syndicated column appears Tuesdays in The Seattle Times. Heady is editor and publisher of four banking publications.