Considering Refinancing? Look Beyond Rates

The decision to refinance a mortgage also depends on upfront costs and future moving plans.

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With interest rates dropping after the Fed's 0.75-point cut last week, more homeowners are considering refinancing their mortgages to lock in the lower rates. Refinance applications have risen 92 percent since the beginning of November, according to the Mortgage Bankers Association.

But whether it's a good idea to refinance depends on more than just the interest rate. Refinancing almost always carries hefty fees, so getting a lower rate can be worth those initial costs depending largely on how long homeowners intend to keep the loan.

"The wild card is how long you plan to stay in your house. If it's a long time, then monthly payments will come down, and you will more than pay for the near-term fees in the savings over the life of the loan," says Aditya Bhasin, head of marketing for consumer real estate at Bank of America. He says that while refinancing costs vary by location, they will generally cost around 1 to 2 percent of the loan's value.

The only way to really figure out if refinancing is worth the cost is to do the math. Bank of America offers a calculator that figures estimated monthly payments before and after refinancing.

Those with adjustable-rate mortgages tied to their bank's prime lending rate may experience an interest rate deduction automatically, making refinancing unnecessary. But if homeowners have an adjustable-rate mortgage that will reset to a higher interest rate after the initial introductory one, now might be a good time to lock in a lower fixed rate, Bhasin says. According to the Mortgage Bankers Association, the average interest rate nationally for a 30-year fixed mortgage is 5.49 percent. For a 15-year fixed-rate mortgage, it is 4.96 percent, and for a one-year adjustable-rate mortgage, it is 5.51 percent.

But watch out for misleading advertisements: They often promise no-cost refinancing, but the costs are just built into the loan itself, so borrowers are still paying them. Bhasin recommends shopping around for lenders, because homeowners don't need to turn to the same one they used for their original purchase.