Time's Running Out to Refinance

By Selena Maranjian
The Money Fool
June 8, 2004

According to several reports, the refinancing boom of the past several years is finally showing signs of slowing. You can blame interest rates, which appear to be creeping upward. You can also blame an improving economy. That's what mortgage giant Freddie Mac (NYSE: FRE) is doing.

Its Office of the Chief Economist released a report last month citing improved job creation, "surging" productivity, a likely interest rate hike from the Fed in the offing, and more. Freddie Mac expects the mortgage business to remain robust in the near future, but a little less robust than usual due mainly to a drop in refinancing. Home sales are expected to continue at a good clip (7.3 million for 2004, more than in 2003), along with new housing construction (1.85 million units).

But whereas refinancings have represented more than 50% of mortgage originations over the past three years, they're expected to constitute just 40% or so for 2004. In addition, adjustable-rate mortgages (ARMs) are expected to remain attractive options for many borrowers, with ARMs making up nearly a third of financings in 2004 and 2005. (Learn more about the homebuying process in our spiffy Home Center, which also features information on mortgages and refinancing.)

According to the Cambridge Consumer Credit Index, just 8% of Americans plan to refinance their mortgages in the next year. This is half the level from Oct. 2002. Thirty-five percent of those surveyed have refinanced in the past two years.

What does all this economic activity mean for you? Well, despite rising interest rates, you may still want to consider refinancing if you haven't done so yet. Here are some reasons why:

You can lock in a long-term lower interest rate, thereby paying less each month.

You can reconfigure your mortgage, perhaps taking out a 15-year loan instead of a 30-year one. If you're snagging a lower interest rate, your payments might not change much, but you'll avoid paying thousands in interest by shortening your loan's life.

You can opt for an ARM if you plan to remain in your home for only a few more years, as ARMs sport extra-low rates.

You may be able to take out extra money with your new loan, especially if your home has appreciated, as many have in recent years. These funds can pay off credit card debt or other higher-rate debts, or they can be spent at Home Depot (NYSE: HD), buying supplies to improve your home.
Don't think you're alone if you've been putting off refinancing for years now. Millions of Americans are in the same boat. If refinancing makes sense for you, take action now before the rates rise much more.

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