'Mastering Your Mortgage' a good buy for homeowner pondering refinancing


October 26, 1992|By MICHAEL J HIMOWITZ

With interest rates at their lowest levels in decades, millions of homeowners are thinking about refinancing their mortgages. Unfortunately, refinancing raises a lot of sticky, "if-then" questions that many of us are hard put to answer.

For example, if you have a 30-year mortgage, should you refinance over the same term with lower payments? Or should you switch to a 15-year mortgage, which could get you out of the loan much sooner?

If you're already seven or eight years into a loan, does it pay to refinance, just apply an extra payment toward principal each month?

If you're thinking of selling your home in a couple of years, how long will it take for lower interest rates to make up for the points and closing costs you'll pay up front to refinance? Unless you're a sharpshooter with a financial calculator or a whiz with "Lotus" spreadsheets, it's not easy to get these answers. And many of the questions have solutions that are far more complex than they appear.

Which brings me to one of my favorite topics -- computer programs designed to do one thing well.

"Mastering Your Mortgage" is a $49.95 gem from Home Equity Software designed for homeowners who are thinking of refinancing, consolidating bills with a home equity loan or entering into some kind of prepayment arrangement.

It isn't slick, but its calculations are sophisticated, and it gives you the information you need.

The program, for IBM-compatible computers, comes with a complete manual written in plain, no-nonsense English. You won't need it to run the program, which is easy to figure out, but I recommend reading it first.

Besides walking you through each part of the program, the manual is an excellent primer on mortgage lending. It's full of useful information, explodes many myths and explains why financial decisions that may seem obvious at the outset may not save you money in the long run.

When "Mastering Your Mortgage" starts, it displays a simple menu showing the program's six components -- Qualify for a Mortgage, Re-Finance Your Mortgage, Pre-Pay Your Mortgage,

Analyze a Home Equity Loan, Compare Multiple Loans and Track Your Mortgage Payment.

Each menu entry brings up a form, or a series of forms. All you have to do is type the information you need in each blank space and hit ENTER. If you're not sure exactly what the program is asking for, you can pop up a context-sensitive help screen with a simple explanation.

When you're through, the program presents you with a complete series of screen and printed reports, including summaries, detailed tables and amortization sheets. If you have an EGA or VGA monitor, you can also view the results in graph format, although the program won't print the graphs.

The first module is relatively simple. It figures out how large a mortgage you can afford, given the price of the home, your down payment, your income, the interest rate and other factors, including the two debt-to-income formulas commonly used by lenders.

Refinancing is far more complex, raising a variety of issues that the program and manual address well.

The program provides forms for information about your current first and second mortgages (if any), as well as for the new mortgage. It doesn't assume they'll all be the same type. You can mix and match among standard fixed-rate mortgages and the newer adjustable-rate mortgages.

Typically, homeowners refinancing their mortgage will opt for a mortgage of the same term as their current loan, with lower payments, or a shorter-term mortgage that may have higher monthly cost but a quicker pay-down.

Conventional wisdom recommends refinancing if current

interest rates drop 2 percentage points below your mortgage rate.

But that may not always be wise. The author notes that standard analyses don't take income taxes into consideration. (Mortgage interest is tax-deductible, which means the government gives you back part of what you pay).

For example, you may choose a refinancing scheme that appears to save you $144 a month. But for someone in the 38 percent tax bracket, the real saving is only $80. That could almost double the break-even period on many typical refinancing schemes. If you think it's likely that you'll sell your house before then, the great deal doesn't seem so great anymore.

Nor do standard analyses take into account the "opportunity cost" you incur by paying points, closing costs, recording taxes and other fees up front, or by switching to a shorter mortgage with higher monthly payments. This money could otherwise be invested, and giving it up deprives you of that income.

"Mastering Your Mortgage" asks for your assumptions about these issues and produces summaries of savings and detailed reports showing your break-even period and the net cash effect of the refinancing at any point over the life of the mortgage.

The program takes a similarly thorough approach to other questions, including the currently popular option of prepaying a small amount of your loan every month. All told, it's pretty sophisticated stuff -- a lot better than you'll ever get from your banker. And it can help you avoid bad decisions.

There are a few rough edges. While it will save your most recent mortgage scenario, the program won't allow you to store a variety of scenarios in different files. This is an annoying omission. Also, the only printout option is a full report, complete with a lengthy amortization table. A summary option would be much better.

But given the money its analyses can save you -- and the mistakes it can help you avoid -- "Mastering Your Mortgage" is a great value.

For information, contact Home Equity Software, 801 W. El Camino Real, Suite 167, Mountain View, Calif. 94040.

(Michael J. Himowitz is a columnist for The Baltimore Sun.)

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