Your present lender may offer best refinancing deal Lower interest rate need not be obtained at a high price

Nation's Housing

January 18, 1998|By Kenneth R. Harney


First Nationwide Mortgage Corp., whose "loan modification" refinancing program for existing customers was described in the Jan. 18 column, now says the program "will be available very soon," but is not yet available.

The program, targeted at existing First Nationwide customers with unblemished payment histories and equity holdings in their home above 20 percent, was outlined by First Nationwide Executive Vice President Terry Rowland in a Jan. 9 interview in which Rowland said the program was available at present.

Rowland's comments triggered what he calls "thousands" of inquiries from First Nationwide's customer base.

First Nationwide service personnel, however, had not been informed in advance of the firm's program or Rowland's comments, and were often unable to assist callers. Although Rowland could not say when customers can apply for loan modifications, he said the program will be limited to First Nationwide clients with adjustable-rate mortgages owned by and serviced by the Frederick-based firm.

YOU'VE SEEN the headlines. You've heard it on radio and TV: Mortgage interest rates are at a four-year low, so it's time to refinance.

But is it really the right time for you? And if so, how do you weigh your options in the current marketplace? Here are a few thoughts to help guide you:

For starters, whatever your current mortgage rate, don't even think about scouring the marketplace for the lowest rate until you've talked about a possible "restructuring" or "loan modification" with your present lender. Although some lenders and mortgage servicers won't give their borrowers the time of day, many large, savvy mortgage companies are creating "customer retention" programs to keep their best-paying borrowers on the books. The carrots: a lower interest rate and minimal transaction fees.

For example, First Nationwide Mortgage Corp., a Frederick-based lender, offers a rate-modification program that

allows qualified refinance borrowers to lower their interest rate close to market level, and it virtually eliminates standard refinance costs such as broker fees, appraisals and credit reports.

To qualify, borrowers need to have pristine payment histories and a solid equity stake in the property (20 percent or more), and they should not be seeking additional cash beyond their present loan balance. They also must stick with the type of loan they already have; i.e., if they've got a 30-year adjustable-rate mortgage, they generally can't switch to a 15-year fixed-rate loan.

For such customers, First Nationwide may agree to lower the current rate close to the prevailing market level, and charge a flat $500 administrative fee. A borrower with an adjustable-rate mortgage at 8.25 percent, for example, might be able to move the rate down to 6.25 percent, plus the $500 fee. On a $175,000 loan, that would mean dropping from $1,314.73 in principal and interest per month to $1,077.51 -- a $237.22 savings per month, or $2,846.64 in the first year alone.

Since the transaction costs are limited to $500, a borrower would recoup all the costs of the rate-modification in just over two months.

If your lender doesn't offer an option like this -- or if your payment history disqualifies you -- ask what program your lender does offer. At the very least, an "in-house" refinance should cut down on your total transaction costs compared with competing loan packages.

Another key consideration: Don't get fixated on interest rate quotes. Instead watch out for loan fees and settlement costs that can transform your low-rate refi into a losing proposition. You've got to ask: How long will it take me to pay for the privilege of cutting my interest rate? Will I still be living in this house when the "break-even" point occurs?

Consider this example provided by PMC Mortgage Corp. of Alexandria, Va. Say you're an aggressive rate-shopper, and you locate a mortgage company willing to give you a $150,000 refinance with a 6.5 percent, 30-year fixed-rate mortgage. Sounds good, but what about transaction fees? The lender quotes "three points" (3 percent of the loan amount) and the customary closing costs associated with a new loan.

Sign up for that deal, and you've got $4,500 in points and $1,755 in settlement charges -- title, underwriting, recording and transfer, appraisal, survey, etc. Your monthly principal and interest will come to $987.

As an alternative, you find another lender who offers a "no-cost" refinance package. No-cost refinancings roll your loan fees and settlement charges into the interest rate you pay. The second lender's rate is higher than the first lender's -- 7.375 percent fixed rate for 30 years. And the monthly payment is higher -- $1,036 vs. $987, a $49 a month difference. But there are no fees due up front or at settlement.

So which refinance option makes more sense -- the one with the 6.5 percent rate or the higher-rate "zero-fee" alternative? No contest: With the 6.5 percent $150,000 loan, you pay $6,225 in transaction fees ($4,500 in points and $1,755 in settlement charges). With the 7.375 percent loan, you pay zero in transaction fees at closing. It will take you 10 1/2 years to recoup the $6,225 upfront cost of saving $49 a month -- longer, perhaps, than you'll live in the house.

So before signing up for any rock-bottom-rate refi package, take a hard look at the transaction costs. Anything requiring more than two to 2 1/2 years for break-even might not be worth your trouble.

Pub Date: 1/18/98

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