Attention all of you homeowners who missed last year's unprecedented mortgage refinancing boom: If you act quickly, you just may be able to hop onto 2002's refi bandwagon before it pulls out of the station. Average rates for 30-year fixed-rate conventional loans dropped below the 7 percent mark last week, hitting 6.88 percent. Fifteen year rates dropped to 6.36 percent. With many lenders and brokers quoting fixed-rate deals well below those averages, you've got to ask yourself--are there opportunities out there for me if I shop around?

Absolutely. New data on mortgages held by America's homeowners suggest that somewhere between $1.25 trillion and $2.5 trillion worth of home loans still carry note rates above 7 1/2-8 percent, and are potential candidates for refinancing in today's market. The borrowers holding those mortgages represent roughly 25 to 30 percent of the homeowning population. Put another way, there's about a one in four to one in three chance that you are a candidate for a refi in 2002.

Phil Colling, an economist with the Mortgage Bankers Association of America in Washington D.C., says that “there are huge numbers of loans out there that can still be refinanced” this year. Most of them were made in either the year 2000--when rates averaged over 8 percent--or in years such as 1990 (10.13 percent average), 1991 (9.25 percent), 1992 and 1994 (both 8.4 percent), or anytime in the 1980s, when 30-year rates were often in the teens.

Colling estimates that of the $5.7 trillion of home mortgages sitting on lenders' books nationwide, as high as $2.5 trillion carry rates nominally high enough for refinancing. But as a practical matter, he says, only about half of those loans could or should be refinanced. Some, for instance, are “subprime” mortgages to borrowers with damaged credit. Subprime loans carry high rates because their borrowers represent higher risks of default. If your mortgage carries a subprime rate, but you haven't corrected the underlying credit problems that led to your higher rate, then you probably won't be able to refi soon.

Other borrowers with high rates who took out their loans 10 or 15 years ago, may not want to switch to a new 30-year mortgage in 2002 because they've already paid off a significant portion of their principal and don't relish taking on a new, long-term debt burden. Still other borrowers can't tolerate the inevitable refi hassles and paperwork--credit checks, appraisals, and potentially high settlement fees--and are not viable candidates for a new loan.

And then, says Colling, “you've got the 'let's-sit-around-and-see' folks,” who can never come to a firm decision on whether or when to apply for a refinancing. “They're a little like the cigarette smoker who keeps meaning to quit but never gets around to it--until he has a heart attack and it's too late.”

If you think you might be a refi candidate--but aren't sure--how can you come to a decision? For starters, forget the old rules about dropping your interest rate by 1 1/2 percent or 2 percent before a refi “makes sense.” In today's marketplace, you can refi profitably whenever you can locate a “no-cost” refinance rate that is as little as 1/2 of a percentage point below your curent note rate.

What's a “no-cost” refi? That's when the broker or lender rolls all or most of the usual settlement charges for a refi into the interest rate on the loan itself. That typically increases the rate by 1/4 of a percentage point above the prevailing market rate.

So, for instance, if you've got a 7 1/2 percent rate on your present loan and you locate a mortgage broker who can do a “no-cost” refi at 7 percent, you should seize the opportunity. It's a no-brainer: You pay little or nothing at settlement and you reduce your monthly mortgage payments.

Other than no-cost deals, make sure you know the closing fees and other expenses up front, so you can be certain that your net monthly savings from the refinancing pay off all costs within a relatively short period--certainly no more than a year and a half or so.

And while you're focusing on your 2002 refi options, think about this too: One of the biggest sources of tax-free money in the entire U.S. economy is the “cash-out” refi. You can refinance a $100,000 mortgage with a $125,000 new mortgage, and put $25,000 cash into your pocket--or into a new car, a boat or a vacation home--totally tax free. That's a federal tax code loophole that's too sweet to miss, if you can take advantage of it in the months ahead.

Published: February 11, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.