# 'Mellody's Math': Seize Chance to Refinance

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With mortgage rates at record lows, the time is right for first-time buyers to take the plunge into home ownership, and for existing homeowners to get out their refinancing calculators.

The National Association of Realtors expects 2002 to be a record year for home sales. Mortgage rates — at 6.26 percent for a 30-year fixed-rate mortgage — aren't just low. They are the lowest they have been since May 1967.

The drop in rates is luring in first-time buyers, and it has existing homeowners scurrying to refinance their mortgage.

What to Do?

Three American families from different parts of the country, with different mortgages and incomes, asked me for advice on refinancing their own mortgages. Check out their questions and my answers below, then turn to ABCNEWS.com's calculators to do your own mortgage planning calculations.

Home Mortgage Calculators.

Q U E S T I O N: Hi Mellody. My name is David and my wife, Tracy, and I live in Arlington, Va., with our two kids. We have a 30-year fixed rate mortgage at \$300,000 at 7¼ percent. If we refinance now, what kind of rate could we get and is it worth the closing costs?

A N S W E R:

If you refinance at the new 30-year fixed rates, you'll save \$196 per month on your payments (1 percent). That's a savings of \$70,560 when all is said and done. You can save much more than that, however, if you make the same payments of \$2,034 per month, since you'll be paying more of the principle each month. So if you added the \$196 savings per month towards paying down the mortgage, you'd shave 6 ¾ years off your payment schedule and save \$94,194 in the end. If you turn to your original lender, it's likely they will charge no fee or a lower fee for refinancing than if you were go to a new lender. If you can't avoid a fee, you should still refinance, as long as you can recoup those fees in savings, within a two-year window. Check out your savings in the table below.

Q U E S T I O N: Hi Mellody. We're the Peri family from Staten Island, N.Y. We bought our home a year ago and have recently refinanced our mortgage at a much lower rate and for 15 years. We're hoping by the time our kids are in college, we won't have to worry about our mortgage anymore. Do you think we did the right thing?

A N S W E R: You're paying paying nearly \$700 more a month at a 15-year fixed rate on your \$475, 000 mortgage, but this is a very good thing because you can save \$461,700 in interest. Although you may not have the whole thing paid off by the time your children go to college, you'll will certainly have much less of a financial burden down the road and into the retirement years. For families that can't make the higher payments on a 15-year fixed rate, they should still refinance at 30-year fixed rate.

Q U E S T I O N: Hi! We're Jen and Peter from Chicago. Currently I am four-and-a-half months pregnant, expecting at the end of December. We also have Sammy (our pet), who is a part of our family. We love living here, although three people might be a little crowded. We have a three-year \$278,000 adjustable rate mortgage at 6 percent. We currently are looking to refinance. What should we do?

A N S W E R: Thirty-year fixed mortages are the most common mortgages people choose to refinance. However, families or individuals who know they'll be moving in the near term should consider an adjustable rate mortgage because those rates are lower and will ultimately save money. If you're certain you're moving within a few years and you choose an adjustable rate mortgage, or ARM, make sure you give yourself an extra cushion and go with a 7-year ARM. It's not a material difference over time and the moving process tends to take longer than expected as you wait on construction and other details.

For those who can see the light at the end of the tunnel, it's best to stay where you are. If you are in the last few years of paying off your mortgage, refinancing is not for you.

Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, Ariel Mutual Funds.com. Ariel Associate Matthew Yale contributed to this report.