A Loan Again
Home is where the heart is, and having your own home has long been a basic part of the American dream. With mortgage rates nearing historic lows, now may be the time to refinance your abode . . . or move up to the home of your dreams. But changing streets doesn't have to mean changing your lifestyle. Right now many lenders provide packages that make borrowing easy and refinancing less of a hassle.
Home, Sweet Home
Let's face it: Some people are financing junkies. They move from lender to lender, rate to rate, in search of mortgage nirvana-the lowest possible rate on the perfect loan. All well and good if that's how you like to spend an afternoon (or two or three), but even if refinancing isn't your idea of an Olympic sport, if your objective is to lower your mortgage payments or pay off your loan faster, refinancing can help you reach these goals.
Experts have varying opinions on when it makes sense to refinance. Edward Dixon, public affairs officer at Citibank in New York City, suggests as a rule that consumers not consider refinancing if there is less than a 2 percent difference between the old and the new mortgage rates. "Closing costs would eat up your potential savings," says Dixon.
Barbie Weiner, mortgage consultant at C.F. Mortgage Services in Charlotte, North Carolina, sees it a bit differently. "If you'll be in the house a long time, it could be worth it." To figure out the number of months it will take to recoup your costs, divide your monthly savings into the total closing costs. For example, if you hold a $100,000, 30-year mortgage at 8 percent, your payments are about $733 per month. If you refinance at 7 percent, your monthly payment would drop to about $665, saving you $68 per month. If your closing costs came to $2,200, it would take 32 months for you to recoup the cost of refinancing. If you plan to stay in your house longer than that, you've made a wise decision.
If your loan is larger or the difference in mortgage rates greater, the savings add up more quickly. But don't plan a visit to your lender just yet: Refinancing costs cut into your savings. Orientation fees (typically 1 percent of the mortgage amount), appraisal costs, attorney's fees, underwriting fees, tax service fees, surveys, discount points, credit reports, application fees, title insurance, document preparation and other miscellaneous fees that vary from state to state can make breaking even a far-off goal. So before you begin compiling the collection of tax returns, bank statements and credit references, you need to be sure you're doing the right thing.
Refinancing involves replacing one mortgage with another. This makes sense for you if as a result you can lower your payments, pay off a loan faster or lower the future risk of paying higher rates. Home mortgages are often a family's largest debt, so picking the right mortgage can affect more than just your cash flow.
Re Fi? Ho Hum
Refinancing is time- and effort-consuming, but if you have a conventional 30-year mortgage, low interest rates can provide an opportunity for you to really save money on a house you plan to stay in. One reason to refinance is to cut the time your loan is outstanding. Although you'll have higher monthly payments, in the long run, you could save big, provided you can make the payments. Here's a common example:
If you have a $100,000, 30-year mortgage at 9 percent, your monthly payments are $804. If you stay in the house for the term of the loan, the house will cost you $289,664.
If you refinance and get a shorter, $100,000, 15-year mortgage at 73¦4 percent, your monthly payments go up to $941. If you stay in the house for the term of the loan, however, the house will cost you $164,429.
The moral of the story? If you can afford the higher payment, you could save $125,235. Heck, with results that good, you could almost buy yourself another house!
Let's Make A Deal
You've decided refinancing will save you a bundle in the long term-but now, who ya gonna call? All your friends are talking about how they just got the world's best interest rate; newspapers and TV ads are hawking fabulously low rates-with loan applications taken over the phone and approval in just an hour. You can't get your dry cleaning done that fast.
It's tempting to start your search with the lowest advertised rate, but real bargains begin at home . . . with your current lender. "It's not necessarily the interest rate that makes refinancing attractive, but the additional costs that do-or, preferably, don't-go along with it," cautions Jim DeMare, loan officer at Market Street Mortgage Corp. in Charlotte, North Carolina. "A super low rate can take a lot of your equity if it involves high costs that are included in your new loan. If the rate offered by your current lender is attractive, you may save on closing costs, appraisals, title insurance and the like. To make a long story short, it pays to look at home first."
If your current lender can't or won't compete for your business, it's time to enter the refinancing zone. Armed with the right information, you'll be up to the task at hand.
Talking with bank loan officers can lead to a great deal. Banks sometimes lower their rates to get a chance at a new customer's future business, including auto loans, lines of credit, credit cards, checking and savings accounts and business accounts.
Mortgage bankers are lenders who offer deals they finance. Mortgage brokers, on the other hand, act as middlemen between you and the lender. If your application fails at one lender, brokers can try others with whom they have a relationship. If your credit report is spotty, this can be your best selection. Some mortgage brokers act as mortgage bankers, able to bid your loan out or take it on themselves.
Though the Bailey Brothers Savings and Loan is no longer in existence, your loan can still have a wonderful life at a midsized bank or thrift. Some are especially competitive in the adjustable-rate area. Commercial banks and some large brokerage firms have begun aggressive credit programs to service their best clients. If a jumbo loan is what you're after, they can do the deal easily.
Brokerage firms often allow clients to use securities as collateral for the loan, so you don't have to rob Peter to pay Paul.
Your tax, legal or financial advisors may be able to refer you to an appropriate lender. Whatever you do, you'd better shop around.
With interest rates near 20-year lows, most borrowers are focusing on fixed-rate loans. For some, however, adjustable rate mortgages (ARMs) are a better idea. If you're sold on a house whose monthly payments put it out of reach, the lower payments of an ARM could help you close the deal.
But don't position that easy chair in the corner just yet. While the initial rate may be alluring, ARMs rise when interest rates increase-and the increased rate can be a doozy!
Adjustable mortgages change their rates on a schedule. Delayed ARMs fix an initial rate for a certain period before converting to annual adjustable loans. Schedules include 3-1, 5-1 and 7-1. That means the loans are fixed for three, five and seven years before converting to a one-year adjustable.
Rates on ARMs are running about half a point less than on fixed-rate loans-not a great deal of savings but still an increase in monthly cash flow. Should you decide to stay in your home, some lenders provide a conversion option that allows you to switch to a fixed loan-for a fee-provided you do so before your loan begins to adjust.
ARMs are not for everyone. However, if you're planning to live in your home for just a few years or don't have sufficient income to make higher payments but plan to increase your earnings, they could save you money.
If refinancing makes sense for you, watch mortgage rates carefully and be ready to pounce when rates drop. Whatever option you choose, getting the right loan can help you get the most from your home.
All figures are courtesy of Market Street Mortgage Corp. and show principal and interest only. Down payments and closing costs are not included. Interest rates are for illustrative purposes only and are subject to change without notice.
Lorayne Fiorillo is a financial advisor and first vice president of investments at Prudential Securities in Charlotte, North Carolina.