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Your Smartest Money Move for 2012

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It's rare that the financial markets give you multiple chances to save money. But as dire as conditions in the housing market have been, the silver lining for many creditworthy borrowers is that refinancing your mortgage can give you fixed rates among the lowest in history -- producing low monthly payments that aren't going to get pulled out from under you down the road.

Big winners, big losers
Unprecedented low interest rates have had a huge impact on borrowers, savers, and financial institutions. For savers, low rates have cut off a major source of income, forcing them to make desperate moves to higher-yielding alternatives like dividend-paying stocks. And for banks, low rates have helped boost net interest income over the longer term, with Wells Fargo (NYSE: WFC  ) , US Bancorp (NYSE: USB  ) , and Canadian/U.S. hybrid Toronto-Dominion (NYSE: TD  ) all posting double-digit percentage gains in net interest income over the past three years.

But for borrowers, the news has been mixed. Some borrowers who are underwater on their mortgages have essentially gotten locked out of the refinancing market, as doing so would require them to pay back tens of thousands of dollars in negative home equity that they don't have. But for others who aren't dealing with owing more than their homes are worth, low interest rates have allowed them to consider either refinancing to create huge savings or trading up to better homes whose prices are at attractively depressed levels.

Just how good are rates?
For the past few years, we've seen mortgage rates repeatedly hit new record lows. Currently, though, 30-year fixed mortgages are under 4% -- meaning that a $200,000 loan would cost just over $950 per month to repay. To put that in perspective, it wasn't that long ago that 30-year mortgages carried rates of 6%, which had homeowners making $1,200 monthly payments.

Those rates may finally be having the impact on the housing market that the Federal Reserve hoped they would have when it cut rates to such low levels. Both PulteGroup (NYSE: PHM  ) and Hovnanian (NYSE: HOV  ) saw their losses narrow in the third quarter, and Beazer Homes (NYSE: BZH  ) and Standard Pacific (NYSE: SPF  ) had huge rises both in new orders and in backlog units. Admittedly, those comparisons come from unusually weak levels, but it's still an encouraging sign.

Weighing the refinancing decision
If refinancing were as simple as just getting your bank to let you make lower interest payments, then everyone would do it. But unfortunately, refinancing often comes with huge closing costs. For instance, you may have to pay mortgage origination fees, typically around 1%, to get a new mortgage. In addition, your bank may require a new appraisal of your home, new title insurance, and another round of other costs such as escrow fees and loan application charges. And if you want the best rates out there, you may have to pay points upfront.

Add up all those costs and they can end up being several thousand dollars. Even if you'd save $250 a month by refinancing, it can take you years to recoup those costs and break even on the deal.

In addition, refinancing involves having to go through the same long, involved process to get a mortgage. And if you originally got your loan during the go-go days of the mid-2000s, you may find that the mortgage process is far more onerous than what you went through back then, because many banks have tightened up on credit standards, and some have upped their standards on the amount and type of documentation you need to get a mortgage.

Make your move
Don't let the hassle of refinancing be an excuse not to do it, though. If the numbers work out to make refinancing a smart option, make it one of your New Year's resolutions to get it done soon. So far, you've been rewarded for waiting, but rates can only go so low before you'll have missed out on the deal of a lifetime.

Dealing with your home is a big part of figuring out how to have a successful financial plan. But you also need to know about one shocking can't-miss truth about your retirement -- and what you can do to address it. Our latest special free report has all the answers, so grab a copy today and find out everything you need to know.

Fool contributor Dan Caplinger did what he hopes will be his last refinancing last year. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of and has created a covered strangle position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gives you the best deal.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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