Homeowners are pursuing lower rates in droves, but not all should

Jeff Heck plans to pull the trigger as soon as mortgage rates dip just a little bit more.

"Our target is if it drops under 5 percent," Heck said. The Antioch resident is playing a waiting game in attempts to lower the interest rate on his vacation home in Door County, Wis. He completed the application and appraisal and now waits for his broker to lock in when the time is right.

Heck expects that if he can capture a rate below 5 percent, he'll save about $200 on his $1,400 monthly mortgage payment. Working as a process adviser for an IT group at Hospira, he carries a 30-year-loan at 5.75 percent on the summer home.

Todd Holtz, 32, is in a similar situation. He's hoping the rates will drop to 4.75 percent so he can refinance his home in Lake in the Hills. With his current interest rate at nearly 6 percent, he figures he should save about $100 a month on his payment.

With mortgage rates dropping to historic lows, homeowners are flooding lenders with refinance applications and questions.

Jim Dobbs, president of Woodfield Planning Corp. in Rolling Meadows, said the volume of refinance loan applications is five times what it has been in recent months.

About 90 percent of homeowners seeking to refinance are simply looking to lower their monthly payment, said Marve Stockert, executive director with the Illinois Association of Mortgage Professionals in Lombard. The others are in a panic and usually facing financial difficulties, he said.

But refinancing isn't as easy as it used to be and lenders are turning down more applications than ever before.

The challenge many homeowners are facing this time around is in the appraisal process. Because of decreasing property values, homes often are assessing for less than when the homeowner bought the house. If the loan becomes higher than the value of the home, the homeowner is denied the opportunity to refinance.

This is most likely to happen to the person who bought property three years ago, said Jodi York-Caraballo, owner of Green Valley Mortgage in Bloomingdale. The homeowner may not be able to refinance or would have to add private mortgage insurance to the loan.

"I believe about 35 to 40 percent of the loans that have been applied for in the past 45 days have been denied because of the value of the appraisal," Stockert said.

The consumer has to be aware and ask questions about the appraisal upfront, or they may lose their application and appraisal fees, he said.

"This is a big issue right now. Before you give money to anyone, make sure your house is going to appraise," Stockert said.

If you have enough equity in the home, there are other aspects to consider.

The rule of thumb is that refinancing makes sense if it results in an interest rate reduction of at least one percentage point. But lenders warn that this isn't always the case.

If you plan to move soon, the closing costs of refinancing would outweigh the savings.

Local lenders say closing costs typically range from $1,500 to $1,800. The homeowner has to figure out how many months it would take to break even. For example, if your monthly house payment went down $100 after refinancing and your closing costs were $3,000, it would take 30 months to break even.

That's too long. Experts say it should take between 10 and 18 months to recoup closing costs.

Some lenders offer the opportunity to refinance with no closing costs. This could force the lender to slightly raise the interest rate. The lender could also pay the closing costs with the profit received from selling the client's loan.

Meanwhile, many brokers expect that rates will go even lower in the near future. "The odds are good rates are going down more," Dobbs said.

It's all about finding the best rate.

"There's a lot of diversity at the banks this time around. It's worth your while to shop around," said Diane Swonk, chief economist at Mesirow Financial in Chicago.