SANTA CRUZ (December 9, 2007) - There are many reasons to replace an existing loan(s) on a home. The most obvious reason to refinance is to save money; however, saving money comes in many forms. Some people are interested in lowering their monthly payments, some people are interested in reducing the number of years left until they are mortgage-free and some are only interested in lowering their interest rate.

Some other reasons to refinance include creating cash, getting out from underneath an adjustable rate mortgage (ARM) or injecting cash in order to lower the payments. These examples presume that there is adequate equity in your home. Although it is possible to refinance if you owe up to 95 percent of your home’s value; you will qualify for the best rates if you owe no more than 80 percent of its value.

The end of the year is always a good time to review your mortgage and, furthermore, rates right now have not been this low since 2005. While it is easy to compare your current 30 year fixed rate with today’s 30 year fixed rates, which are well under 6 percent (for conforming loans at or under $417,000), it is not easy to compare potential savings without knowing what the costs and payments will be and what the term extension will be. It is also very difficult for a homeowner to compare one ARM with another ARM because there are far too many variables involved.

A common misconception about refinancing is that it does not make sense to refinance unless you can shave 1 - 2 percent from you current rate. That is based on 1) the presumption that a borrower has to pay closing costs in order to refinance and 2) the savings enjoyed by refinancing must be realized in the first two years. That is simply not true. While it is true that there are costs to refinancing, they do not have to be paid all at once. The closing costs may be paid in one of three ways: cash can come from the borrowers’ savings account, the loan amount can be increased to cover it or the interest rate can be increased so that the closing costs are paid over time. Let’s assume that a 30 year fixed rate today would be at 5.75 percent and would require closing costs of $7,000 to obtain a $400,000 loan. However, if the borrower chooses an interest rate of 6.25 percent, the lender will pay the closing costs and the borrower will have no out-of-pocket expenses for the refinance. If the borrower’s current interest rate is at 6.50 percent, he would still save $1,000 per year or $83 per month in interest by refinancing down to 6.25 percent. On the other hand, if the borrower’s current rate was 7 percent, he would save $3,000 per year or $250 per month. Wouldn’t you refinance?

Comparisons involving ARMS or deciding whether or not to refinance out of an ARM and into a fixed rate mortgage are much more complicated and require careful consideration by a mortgage professional. It is a great time to give your loan officer a call to determine if it makes sense for you to consider a refinance. If you don’t have someone to call that you can trust, ask a friend, work associate or relative who they recommend.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 or email him at Peter@SantaCruzHomeFinance.com.