Watch changing mortgage rates as big financial news keeps unfolding. It could be time to refinance.

The housing market's cratering sure makes it tougher for homeowners to sell. But those staying put, out of preference or pressure, may save a lot by refinancing if they tax-plan wisely.

A refinancing application boomlet hit two weeks ago, as mortgage rates fell on the federal takeover of loan outfits Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News). Rates have fluctuated since with banks' risk worries, but remain down from a month ago.

"For those with good credit, this may be a unique opportunity to grab a relatively low-interest loan," said Joseph Tredinnick, a Cherry Hill, N.J.-based TD Commerce banker.

Economic events could encourage a trim to the key fed funds rate, kept steady at a midmonth meeting. But so far, officials have held off. The rate can affect adjustable-rate mortgages more than fixed mortgages.

Homeowners can immediately increase cash in their pockets by refinancing at reduced current rates.

At midweek, 30-year fixed conforming mortgages averaged 6.24% and jumbos 7.60%, down from 6.57% and 7.68% respectively four weeks earlier, says loan-tracker HSH Associates. That's a third of a percentage-point 18op in conforming rates. On a $200,000 mortgage, it's a difference of $43.22 a month, $15,560.36 over the life of the loan.

Say a homeowner now has a 7% 30-year, $250,000 mortgage with $200,000 left to pay off. If he's soon able to get a 30-year refinancing at 6%, that would cut payments from $1,663 down to $1,199.

Time It Right

It's important to consider the length of the loan.

Because the homeowner has already paid down the original 30-year mortgage, by accepting another 30-year obligation the total paid would increase. South Jersey real estate agent Sandi Lichtman says she has a solution to avoid that.

"Use the monthly savings to pay down the principal," she said. Make specific principal payments, to pay off a new loan over the same years as were outstanding on the old.

"If the interest rate is lower, you have to save money," Lichtman said.

A rate drop of just 1% on a $200,000 loan is almost a $2,000 savings the first year alone. Because principal drops monthly, yearly savings go down too. But the homeowner is always paying less in interest than if there was no refinancing.

"It's hard to go broke taking profits," said Noam Yalon of TimePlus Payroll, in Cherry Hill, N.J.

Paying at a lower interest rate also cuts the tax deduction for those who itemize. Continuing the earlier example, in the top 35% bracket, a $2,000 loss in an interest deduction costs $700 in additional taxes paid. But that's still $1,300 in-pocket.

What if the bank requires "points" to refinance? These lender charges are also called loan origination fees, maximum loan charges or premium charges. If just for use of money, they represent extra interest.

A point 19 1% of the loan amount. So one point 14 a $200,000 mortgage costs a homeowner $2,000.

Points on a mortgage for a principal home one is buying or improving are normally allowed as deductions in full the year paid. But points on a pure refinancing must be amortized.

The IRS allows two methods. Choosing the internal rate-of-return basis method, the bulk of deductions is in early years. The other method, a "ratable basis" that divides points over the number of months of the loan term, generates an equal deduction each month. Most taxpayers use that one.

A homeowner could get extra tax savings if circumstances change. When selling the residence, any unamortized points are deducted in the year of the sale. If there's a second refinancing, any unamortized points on the first are allowed in full the year of the new refinancing.

Say on Jan. 1, 2003, a homeowner paid $3,600 in points on a 30-year refinancing and refinanced again Jan. 1, 2008 -- but for a 20-year term, paying $2,400 in points. For 2008, an expense of $3,000 would be allowed on the first refinancing, plus $120 on the second.

Home For How Long?

What to do about points depends on time horizon. Even if deductible, points paid cut the savings from the decreased interest rate. If moving soon, a no-points loan, even with a higher rate, may be better. The longer the home is kept, the less the impact of the points and the greater the savings from the refinancing.

Loan availability has been shrinking and creditor concern has cut loan-to-value ratios. Only people with good credit ratings are apt to get favorable refinancing deals. But those who do can keep more hard-earned dollars in their pockets.

Schnepper is a New Jersey lawyer and CPA, personal finance columnist and the author of several books on tax strategies.