How to determine if it would pay to refinance your mortgage

Staying Ahead

February 19, 1996|By Jane Bryant Quinn

NEW YORK -- Homeowners are swarming to redo their mortgages.

Behind the boom: a drop in interest rates and mortgage fees. Last year at this time, interest rates on fixed loans averaged 9.3 percent, according to HSH Associates in Butler, N.J. Now they're at 7.3 percent. Upfront costs are also down. That makes it profitable to refinance for a rate cut of around 1 percent, says John Lewis, managing editor of Inside Mortgage Finance, a newsletter based in Bethesda, Md.

Here's the traditional way of telling whether refinancing will pay:

Compare the new loan's upfront cost with the total amount that you'll save in monthly payments each year. Upfront costs could include such things as title insurance, legal fees, document fees, appraisal fees and points (a point is 1 percent of the loan amount). Probable range: $1,500 to $2,000. Costs will typically be higher if you refinance for a larger amount than you owe now.

You should refinance if your savings exceed your costs over about two years (assuming you'll be in the house that long).

There are other gains to be gotten from refinancing:

* You could switch from a variable-rate to a fixed-rate loan. This accounts for a majority of refinancings today, says Richard Beebe of BankAmerica Mortgage. Monthly payments on variable mortgages rise and fall with interest rates; fixed mortgages, by contrast, cap the amount you have to pay. Your payments won't rise, and they could fall if rates decline and you refinance again.

* Switch from a 30-year to a 15-year mortgage. That's the choice of about one-third of people who are refinancing, says Donna Callejon, a senior vice president of the Federal National Mortgage Association (Fannie Mae). After the switch, your monthly payment will probably stay level or rise a little, because you're repaying the loan over a shorter term. But the interest rate on 15-year loans typically is lower by one half of 1 percent than the rate on comparable 30-year loans, says Doug Robinson of the Federal Home Loan Mortgage Corp. (Freddie Mac).

You'll pay much less interest and build equity faster.

* One popular choice today is a hybrid mortgage: a fixed rate for anywhere from three to 10 years and a variable rate thereafter. Monthly payments are lower than on pure fixed-rate loans. But consider a hybrid only if you expect to move within the fixed-rate period. If the fixed term runs out and rates have jumped, you may be hard-pressed to pay.

* In some states, you can cut your upfront costs, or shave a bit off your mortgage rate, by accepting a mortgage with a prepayment penalty. In return for the price cut, you agree to keep the loan for three to five years and pay a penalty if you don't. Penalties vary from bank to bank.

But consider this loan only if you'll stay in your house for several years and you don't expect interest rates to drop. (If they do drop, you might save more money by being free to refinance.) The best loans charge the penalty only if you refinance, and waive it if you move or add small prepayments to every regular payment you make.

Start your search for a cheaper loan with your own lender. It might give you a break on the upfront costs to keep you from going somewhere else. Mortgage company rates are especially attractive today.

And don't look just at the interest rate. Lenders today are competing for your business with lower upfront costs, lower down payments and faster mortgage approvals. CrossLand Mortgage, based in Salt Lake City, has just announced it will use a new loan-screening process developed by Fannie Mae. It should give you a "yes" or a "no" in minutes, pending an appraisal of the property.

If you haven't enough time to price-compare yourself, look in the Yellow Pages for a mortgage broker. He or she can do the shopping for you. It generally doesn't cost any more to borrow through a mortgage broker than to deal with a lender directly.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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