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Mortgage Rates Current Trends

Posted by  on Apr 16, 2009
 
Mortgage rates have been hovering below nine percent since the latter par of 1991. While some economists predict that rates will go lower, others are growing concerned that rates may have bottomed out. For homeowners with high fixed-rate or adjustable-rate mortgages now might be a good time to refinance. Quantifying potential savings from refinancing is complex. It involves determining whether the current value of after-tax savings from a lower interest rate exceeds the up-front cost of refinancing. Such savings are measured over the time during which a taxpayer expects to own the house, which may be significantly shorter than the term of the mortgage.

Usually, refinancing costs include loan discount points and origination fees on the new mortgage, usually about two to four percent of the mortgage amount; Appraisal and survey fees; Title search fees and title insurance premiums; Recording fees; Credit report charges; and prepayment penalties. To determine the exact savings from refinancing, two computations are required. First, all costs and benefits are converted into after-tax values to be comparable. For example, after-tax front-end refinancing costs are compared to after-tax interest savings. Second savings and costs are reduced to their present value. Costs incurred to refinance are real costs today. Savings, however, will be spread over a future time. As a result, dollars saved five, ten, or fifteen years from now are worth only a fraction of that amount today. For example, a monthly savings of $150 will be worth approximately $32 in 20 years, assuming an eight percent discount rate.

Remember that if a person intends to keep a home for another four to six years, and the difference between the current mortgage rate and the new mortgage rate is two percent or more, it is time to think seriously about refinancing.

If up-front costs will be recovered before the anticipated date of selling the house, then refinancing is advantageous. For example, assuming that a new mortgage will reduce the monthly payment by $200 and that it will cost $3,600 to obtain the new mortgage, the formula indicates it will take 18 months to recover the costs of refinancing. This computation is only a guideline, however. It does not take into consideration income tax effect, present value, and opportunity costs.

Total refinancing costs traditionally run approximately three to five percent of the new loan amount. However, because the market is very competitive, one should shop around. When refinancing, many people are tempted to take advantage of the lower interest rates by borrowing extra cash, assuming that the interest will be fully deductible. However, tax law only allows a home mortgage interest deduction on acquisition debt up to $1 million, plus home equity loans totaling $100,000.

Interest paid on refinanced debt in excess of the outstanding balance of the acquisition debt being replaced will be fully deductible home mortgage interest only in two circumstances. Interest on extra mortgage debt used to pay for substantial improvements to a home is fully deductible as long as the total of such loans and other acquisition debt is less than $1 million.

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