The government takeover of Fannie Mae and Freddie Mac could potentially increase your tax bill down the road. It can also mean it's a good time to refinance.

Two of the largest mortgage companies in the U.S. have been taken over by the government. Foreclosure rates are still rising, more than a year after the housing crisis began. Housing values are largely unstable. It seems like this might be the worst possible time to consider a mortgage refinance. But as legendary singer Al Jolson said famously in 1927, "Wait a minute-you ain't heard nothin' yet."

Taking the bad with the good

The federal bailout of Fannie Mae and Freddie Mac has a variety of long-term economic consequences, many of which cannot be predicted with any degree of accuracy. Undoubtedly, the bailout will be expensive, feasibly opening the door to higher taxes and reduced government services.

Homeowners who get consumed with anger over what might be, however, may miss out on an immediate opportunity created by the takeover-the opportunity to do a mortgage refinance for a lower rate.

Less than a week after Fannie Mae and Freddie Mac went into conservatorship, mortgage rates had already dropped noticeably. Four days after the announcement, the average rate on a 30-year fixed-rate mortgage fell from 6.35 percent to 5.93 percent; both rates assume 0.7 points paid at closing. The average 15-year fixed rate dropped, as well, from 5.9 percent with 0.6 points, to 5.54 percent with 0.7 points. Mortgage rates are now lower than they've been since April, 2008.

The refinance question

It's always a good idea to re-evaluate your mortgage when rates drop significantly. If you need to make changes to your terms, such as lengthening or shortening your amortization schedule, you might as well do it when mortgage rates are low. Here are the factors to consider when deciding if now is the right time for a mortgage refinance:

  • How much money will you save monthly if you refinance right now?
  • How much will you pay in closing costs?
  • How long will it take for you to recover your closing costs? (To find the answer in months, divide your closing costs by the monthly savings.)
  • How much longer will you live in the home? Does that give you enough time to recover your closing costs? What are the chances that your plans will change?
  • How will a mortgage refinance affect your payoff date? Does it make sense to reset the 30-year clock again?

You should also run a few scenarios with a mortgage calculator to get a firm grasp of the numbers. Do that, and you'll know whether there's a ray of sunshine for you amid these Fannie Mae and Freddie Mac storm clouds. In the wake of all this bad financial news, having the option to refinance and save money is definitely something to sing about.

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Published on October 7, 2008