With Rates Low, The Time Is Now Refinancing: A Primer

March 14, 1993|By Adriane B. Miller | Adriane B. Miller,Contributing Writer

With interest rates plunging, thousands of area homeowners have already refinanced their mortgages. If you haven't yet, financial planners say, you should think about it.

* Reducing the monthly mortgage payment and upfront costs.

This refinancing option costs less in the beginning, more over the long term.

If you move every few years, it may make sense, since you'll be able to pay a slightly higher rate but fewer upfront points.

Keith Stackhouse, president of Atlantic Residential Mortgage Co., said borrowers who paid three-eighths of point on a refinancing Tuesday could get a 15-year loan at 7 percent interest. Borrowers who paid 2 3/4 points qualified for 6.5 percent interest.

"We're offering nine different rates with various discount points," Mr. Stackhouse said, adding that most other lenders have as many options. He agrees that so many choices could be confusing to potential borrowers.

"Just lay out what payment you want to come out with the right plan," he said.

"If you have the option, you're better off taking a little higher interest rate in lieu of paying points," suggests Frank Hajek, a Bel Air certified public accountant. "That way you have flexibility if you have to move."

* Reducing the length and cost of the loan term. This option requires a higher initial outlay but lower long-term costs.

To reduce the lifetime cost of the loan, you have to pay it off faster. To do so, you have to pay more each month. If you're going to be in the house for the long term, and if you can afford to pay more points upfront, you'll probably qualify for a lower interest rate, saving you money over the long haul.

"If you think you'll move in the next three to five years, it's probably not going to benefit you in the long run," Mr. Hajek said. "You've got to be fairly committed for it to make sense."

The best financial strategy is to get a lower rate and shorten the life of the loan at the same time, mortgage experts say. If you can lower the monthly payment through refinancing but can't handle a shorter loan term, you can still come out ahead. Pay your old mortgage amount and specify that the extra money is to TC be applied toward the principal. That will reduce the cost of the loan considerably, and you'll own the home outright much sooner.

If you want to pay off the mortgage sooner and wouldn't have trouble making slightly higher payments than you're making now, check into swapping a 30-year loan for a 15- or 20-year loan. The interest rates may be lower on those loans, even though the monthly payments will be higher.

What will it cost?

A refinanced mortgage is not a second mortgage. It is a brand new loan, and lenders require borrowers to go through the entire application process, paying all or most of the fees.

Prepare to pay several thousand dollars in closing costs to refinance, most of which you'll be able to roll back into the loan. Costs will include:

* Points. Each point is 1 percent of the loan. Most lenders negotiate how many points you pay. Generally, the more points you pay upfront or attach to the loan, the lower the interest rate you'll get. If you don't want to pay any points at all, you may do that, too, but the interest rate will probably be higher.

Most lenders now require a good- faith deposit -- about a half to a full point -- in cash up front that they will later credit to your closing costs.

* Lock-in fee. This is optional, and you do have to ask for it. Mr. Stackhouse said it guarantees that the interest rate you ask for when you apply for the loan is the same rate you'll get when the loan is approved. Some lenders charge a fee, typically a half to a full point, to lock in. The fee is often refundable at closing.

* Application fee. This pays for the appraisal and credit report. Usually around $350, it is required in cash upfront.

* Other fees may include legal services, a title search to verify that you own the property, a termite report if required and recording fees.

* Escrow funds. You'll have to advance money for hazard insurance and property taxes to the new loan. If you're refinancing with the company that has your old loan, they may be able to simply transfer the escrow account from the old loan to the new.

If you refinance the loan through the company that originally wrote it, you may be able to save money on closing costs. Household Bank, for instance, offers its current mortgage customers a 25 percent discount on the origination fee of 1 point that new customers pay. They can also streamline other procedures to save you money.

Lenders say homeowners typically must pay to update the title and to get a new appraisal, though, even if the home was purchased less than a year ago.

"The title insurer wants confidence there are no intervening liens," said Jayne McGeehan, senior vice president of Household Bank.

Mr. Stackhouse said such liens could surface the day after the original title search.

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