Rethinking How to Refinance Home Loan
Terry Savage
11/08/05 - 10:42 AM EST
Do you think you can beat the market -- the mortgage market, that is?
Americans have become experts at pulling money out of their homes, to the tune of $600 billion in 2004. Much of that refinancing was done at adjustable interest rates -- and now the rates are adjusting upward. So maybe it's time to reverse the process and start putting money
into your home equity. Or at least to refinance those home equity lines of credit to a fixed-rate loan.
In the second half of last year, 63% of new mortgages were subject to interest rate adjustments. And 23% of new loans were "interest only" loans. Those loans are potentially the most dangerous, though they make home ownership more affordable.
If you have a $200,000 interest-only mortgage at 5.25%, you'll pay $875 per month on your loan. But if rates rise just 1.25 percentage points, to 6.5%, the monthly payment on that interest-only loan jumps to $1,083. That can put a serious dent in your budget, even without taking into account rising utility costs.
If you're thinking about refinancing, there are a few key things to consider.
Where to refinance: Obviously, you'll be checking interest rates at local institutions and at Web sites such as QuickenLoans.com, as well as the Web sites of every major banking firm. Be aware that some sites, such as LendingTree.com, exist primarily to generate leads for mortgage brokers. But there are good reasons to do business with a local institution or mortgage broker.
Mortgage broker vs. bank: The critical ingredient in refinancing your mortgage is finding someone you trust. A good place to start is your credit union or bank, or the financial institution that currently holds your mortgage. But with personal banking relationships scarce these days, you might also ask friends for a reference to a mortgage broker. Just as you would choose a stockbroker or financial adviser very carefully, you'll want to take the search for a mortgage broker seriously.
Randy Johnson, author of
How to Save Thousands of Dollars on Your Home Mortgage, advises you to "look for a mortgage broker who is your advocate, and who charges a reasonable fee and doesn't lie about it." He suggests getting a written fee agreement, in addition to the standard "good faith" estimate of all the closing charges and brokerage fees or compensation paid to the broker by the lender. You can get a sample form at Johnson's
Web site.
The advantage of a good mortgage broker is that he or she can get different quotes from different lenders for different products. "A good mortgage broker is constantly researching their lenders' rate sheets to find the most competitive rate for their customer for a specific product on that specific day," says Chicago-area mortgage broker David Hochberg, president of Townstone Financial.
Term limits: If you're planning to stay in your home for many years, it makes sense to take a fixed-rate 30-year mortgage. But if you've already lived in your home for several years, that may stretch out the mortgage. So consider a 15-year fixed-rate mortgage. The rate will be slightly lower, but the payments will be slightly higher. Over the long run, though, you'll save a fortune in mortgage interest.
If you're worried about being locked into higher monthly payments, another alternative is to take the 30-year fixed-rate loan and pay extra on the principal every month, as long as you can afford it.
Closing costs and points: Everyone hates to write a check for closing costs, so there is always a lot of maneuvering on this subject. Try to avoid paying points to lower your rate -- unless your employer is covering this cost through a job relocation package or you're planning to stay in the home forever, in which case the lower rate will save you a lot of interest over the years.
There will also be closing costs that include appraisal, credit reports, title fees, flood certification and lender underwriting fees. Usually those fees average about $2,000, but in some states they may be much higher.
Yes, there are commercials for "no fee" refinancing -- though at a slightly higher rate. You may not mind paying that higher rate (and paying the broker slightly more commission) if you're only staying in the home for a few years, and if the refinancing saves you money every month. The mortgage broker uses the extra commission to pay for your closing costs.
Says Hochberg, "It's not about the rate; it's about the monthly payment." He specializes in refinancing to eliminate other personal debt. Within months, eliminating other debt improves the homeowners' credit score. Then homeowners can refinance again at a lower rate accorded to those with better credit. But that process requires discipline to pay down debt, and time to heal the wounds. In the meantime, rates could rise.
With so much refinancing going on, it's tempting to think you can beat the mortgage market. But don't get caught in a vulnerable position just because you're searching for a low monthly payment. With rising rates, today's low payment on an adjustable-rate or interest-only loan could easily soar into unaffordable territory. And that's the Savage Truth.
