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Refinance? If it feels right

Forget the 2 percent rule. Forget hunches, crystal balls, or others' pinions.

Anyone interested in refinancing a home mortgage today because of dropping interest rates should rely only on gut instinct and their plans, local lenders say.

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“If you like the rate, refinance,” said Bob LaClair, vice president of mortgage lending for Fifth Third Bank of Northwestern Ohio. “So many times people hesitate, even supposedly those in the know, and say, If it drops another eighth, I'll do it.' But you can never catch it at the very bottom.”

Rates on 30-year mortgages have dropped nearly 1.5 percentage points since May. The national average on a 30-year fixed-rate loan averaged 7.02 percent this week,, up slightly from 6.89 percent last week but well below the 8.26 percent a year ago. The 15-year rate this week is 6.63 percent, up from 6.49 percent last week but down from 7.86 percent a year ago.

Interest rates in the Toledo area typically are up to 0.25 percentage points higher than national rates.

Nearly two-thirds of loans nationwide originated during the week ended Jan. 12 were refinances, according to the Mortgage Bankers Association of America, a 10 percent jump from the previous week and more than four times the refinance activity six months earlier. The uptick in refinances came a little more than a week after the Federal Reserve dropped bank lending rates by a half percentage point, which lowered the prime lending rate to 9 percent.

Dawn Cox, a lender with Mid Am Bank, said she has averaged 20 to 30 calls a day from customers considering refinancing loans of 8.25 to 8.75 percent, some of which were issued last year. Some potential borrowers, she said, now seem to be waiting to see whether the Federal Reserve will again drop interest rates when it meets Jan. 30-31.

One customer waiting to lock into a rate is Marc Monnette, a member of the family that owns the local Monnette's Produce Market and who took out a jumbo loan of 8.25 percent last summer on a Maumee home and now hopes to refinance at 7.5 per cent or lower. He said he'd use the savings on vacations.

“I'm definitely going to refinance,” he said. “If I get it to 7.5 percent, I'll save roughly $200 a month.

Even though experts think the Federal Reserve likely will drop rates more, they say mortgage rates probably are about as low as they will go.

That makes refinancing a prime consideration now.

“You have to take into account how long you plan to stay in the house, if you need to get cash out for financing a college education or a new car or for another reason,” said Dave Warner of the Washington-based trade group.

“With lenders offering no-cost or low-cost refinancing, sometimes it makes sense to refinance even if the difference is 1 percent.”

It used to be that if mortgage rates dropped 2 percent from a homeowner's original rate, it made financial sense to refinance the loan. But today, with rates low to begin with and many lenders offering to roll in the closing costs, homeowners should look at other factors, local lenders say.

Bob Duck, manager of Colony Mortgage in suburban Toledo, said he had a client who recently refinanced a 30-year loan issued in June with a rate of 8.5 percent.

“He's going into a 20-year at 6.875 percent,” he said. “So he's coming out with the same basic payment, maybe it's going up about $20 a month, but he's knocking 91/2 years off the term of the loan.

“If they're okay with the payment, now could be a good time to cut the loan.”

The higher the loan, the more advantage to considering refinancing. Plus, homeowners paying private mortgage insurance may be able to drop that and save money by refinancing. The new loan would require a new appraisal, which might show the house value has risen enough to give the owner a more than 20 percent stake, eliminating the requirement for private mortgage insurance.

Before refinancing, however, an owner must consider the closing costs on the new loan, charges of several hundred dollars that may not make sense to do if the person plans to move within a few years or if the existing loan is almost paid off, local lenders say.

Refinancing costs traditionally amount to about three-fourths of an original loan closing, experts say. Locally, that would mean about $1,100 in average closing costs on a refinancing, said Ted Grambo of National City Bank in northwest Ohio.

Closing fees on a refinancing should amount to 3 to 6 percent of the loan, according to the national mortgage bankers group. For example, if an original $80,000 mortgage has been paid down to $60,000, a borrower can expect refinancing charges of $1,800 to $3,600.

Borrowers are advised to make sure the term of the refinanced loan is no longer than when the original loan would have been paid off. Taking out a new 30-year loan to replace a 30-year loan that a homeowner has had for 10 years means paying interest for 40 years instead of 30. That, of course, would mean someone would lose money, even if the rate were lower.

The lower mortgage interest rates have prompted a lot of inquiries about refinancing, local lenders say.

“Our refinancing has increased dramatically since the beginning of the year,” said Martin Sutter, president of Genoa Bank. He estimates that the bank has done 70 percent more refinancing in the first 17 days of this month compared with the same period last year.

As for advice to people considering refinancing, he said, “I tell them to take a look at their own personal financial situation. If they're very leveraged with other consumer debt, perhaps they should try to utilize their additional savings from their [lower] mortgage payment to pay down consumer debt or to even start saving money.”

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