Many are refinancing their refinancing

Nation's housing

October 07, 2001|By KENNETH HARNEY

THE FINANCIAL question facing millions of American homeowners right now is not: Should I refinance my mortgage?

For many of them, it is: Should I refinance my refinance?

According to mortgage securities industry estimates, slightly more than half of the country's outstanding home loans carry rates of 7 percent or higher. One out of four loans carries a rate of more than 7.5 percent, one out of eight a rate of 8 percent or higher.

During the 1990s, the percentage of homeowners with rates above 8 percent was much higher, but many of those loans were refinanced in the "refinance boom" years of 1993 and 1998.

But now many of those who refinanced - even those who closed on new loans within the past 12 months - are looking at fixed 30-year rates of 6.75 percent and below, 15-year rates of 6.25 percent and adjustable-rate mortgages in the 5 percent range.

One of those is Doug Duncan, chief economist of the Mortgage Bankers Association of America. He has a 7.25 percent, 30-year fixed-rate loan, and he's about to refinance to a 15-year fixed-rate loan under 6 percent.

Duncan, who is cutting his rate and term as part of a financial plan to become mortgage debt-free in the years ahead, says there are "huge numbers" of baby boomers and other homeowners facing similar choices.

Attention also is focusing on a technique that allows homeowners in the above 7 percent mortgage-rate bracket to refinance, with little or no money out of pocket. These "zero-cost" refinancings involve no appraisal, credit, title or other closing fees at settlement. Those standard fees, plus compensation for the mortgage broker, get rolled into the interest rate on the note.

The rate, for instance, might be one-quarter of a percentage point higher than the otherwise prevailing rate for a particular type of mortgage. Last week, zero-cost refinances were available at rates so low that even some homeowners with rates in the 7 percent range could cut their monthly payments immediately, with nothing out of pocket: 15-year mortgages at 6.5 percent with no fees, 30-year loans at 6.875 with no fees and hybrid "7/23" adjustable-rate loans at 6.375 percent, also with no fees.

In the case of the "7/23" hybrid, your rate would be 6 3/8 percent for the first seven years, then shift to an adjustable-rate for the remaining 23 years. Most borrowers using 7/23 hybrids know that they're not likely to remain in the house for more than seven years, and essentially are taking out a low-cost, medium-term fixed-rate mortgage.

One of the country's top experts on zero-cost refinances, Henry Savage, president of PMC Mortgage Corp. of Alexandria, Va., says the concept can be a big money saver, but it has some potential pitfalls as well. For example, some lenders market zero-cost transactions that tack the closing costs and fees into the loan principal balance, rather than as a premium on the rate.

Consumers who have to sell within a few years of refinancing then find themselves with less equity in their house than they thought. Prepayment penalties are another feature to avoid, Savage says.

Refinancing your previously refinanced loan can trigger some surprise tax issues as well. For instance, although many borrowers assume they can deduct interest without limit on larger and larger refinances, this is not true. You can deduct interest on your "acquisition indebtedness" - your original mortgage principal balance minus the principal you've already paid off - plus another $100,000 of "home equity" debt. Refinance proceeds that are used to make substantial improvements to the house count as additions to acquisition debt.

Say you bought your house with a $200,000 mortgage in the 1990s, paid off $10,000 in principal, and later refinanced into a $275,000 loan, the net proceeds of which you used for personal expenditures. Your last refinance moved you within $15,000 of your interest-deductibility limit. ($200,000 minus $10,000 equals $190,000. Add $100,000 for home equity debt and you've got a $290,000 cap.) Should you refinance again this round, and seek to pull out substantial cash, you could exceed your legal limit.

Martin Nissenbaum, national director of personal tax planning for the accounting firm of Ernst & Young, says that homeowners in high-cost housing in high-appreciation markets are the most likely to bump into this limit.

Nissenbaum also advises those refinancing to review other tax rules affecting their transactions. For example, "points" on refinancing are not deductible in the year they are paid. They must be deducted on a pro-rata annual basis over the term of the loan.

The good news here for serial refinancers is that you can write off the full balance of your non-deducted points from your previous refinance against your taxes this year.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C., 20071. Or e-mail him at

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