It's Not Too Late to Refinance

Kiplinger's Personal Finance Magazine, Dec, 1998 by Elizabeth Razzi

You could still cash in even if you missed the very lowest rates.

So you're not Quick Draw McGraw when it comes to refinancing your mortgage: Maybe you missed out on a 30-year, fixed-rate loan under 6.5% this fall. But don't hang up your holster yet--you still have a clear shot at a better deal.

Homeowners trying to refinance in mid October sampled the stressful life of a bond trader. Rates--which for weeks had been lolling about at record-low levels of 6.5% on average for a 30-year mortgage with one point--shot back up half a point in two frenzied days as the throes of the international bond market created an increase in mortgage rates here at home. "Rates were rising so fast you couldn't get your people locked in fast enough," says Lore Cook, a mortgage broker in Pleasanton, Cal.

But a week later rates were headed back down, giving brokers and borrowers some relief. "When rates are going up, people are flooding to the closing table. When rates are coming down, people are holding off, trying to find the bottom of the market," says Bob Brown, an executive vice-president at Countrywide Home Loans.

Tim Winkler, a plant comptroller in Janesville, Wis., isn't worried about missing the bottom. He's a refinancing veteran, biding his time, waiting for his next chance to come along. If it doesn't, it doesn't.

Winkler bought his house in May 1997 with a 30-year, fixed-rate mortgage at about 8.3%. In July of this year he refinanced to an 18-year loan at 7.2%. The closing costs, which he rolled over into the new loan, equaled one month's mortgage payment. His payment actually went up about $30, but he stood to build his equity much faster.

When Winkler saw rates in his area hit 6.2% this fall, he started thinking about another refinance-maybe into a 15- or even a ten-year loan. But rates started to creep up, so he held off. "It's not keeping me awake at night," he says.

DOES IT MAKE SENSE?

Fortunately, you don't have to worry about timing the bottom, either. The numbers can still make sense--especially if your rate is above 7.5%. "Refinancing to a rate between 6.5% and 7% is still a pretty good deal," says Frank Nothaft, deputy chief economist at Freddie Mac, which buys mortgages for resale on the bond markets. He expects rates to stay in that range into the new year.

You're a candidate to refinance if you can lower your monthly payment and recover the closing costs before you move--or refinance again. Take the total cost of the refinance and divide it by your monthly savings. That tells you how many months it will take to recover your costs. What if you have a close call--say, a $200,000 30-year loan with a fixed rate of 7.5%? Should you refinance to 6.8% with no points and $2,600 in fees, which you'll roll over into your new loan amount? Refinancing will lower your monthly payment by $77--and it will take 34 months to break even--so maybe you'll want to wait for a lower rate. (The calculators at www.kiplinger.com can help you figure out your own break-even point.)

Many refinancers are replacing 30-year loans with 15-year mortgages, which offer about half a point break on the interest rate compared with the 30-year term. Rates on 20-year mortgages fall in between those two. A $200,000 30-year fixed loan at 6.7%, for example, carries a payment of $1,291 per month. Cutting the term in half, to 15 years, at 6.37% costs $440 more per month.

Although shorter-term mortgages, save a lot in interest over the life of the loan, your monthly payments will be higher. You may actually come out ahead if you get a 30-year loan and invest the difference. Still, shorter-term loans can be a good idea for people who'd like to get rid of their mortgage in time for retirement.

Almost anyone still left in an adjustable-rate mortgage would be better off refinancing into a new fixed-rate loan. Usually the first year of an ARM is artificially low, and you could be in for a full two-point rise at your first anniversary. That puts you roughly at today's 30-year fixed rate. "With rates at a historical low, it's better just to go to a fully amortizing 30-year fixed rate," says Brown of Countrywide. "Who knows when we're going to get here again?"

POINTS OR NO POINTS?

Most refinancers choose a no-points loan--partly because the prepaid interest on a refinance is not immediately tax-deductible as it is on a home-purchase loan. You have to deduct them over the life of the loan.

But a no-points loan doesn't mean no cost. "If it's a zero-point loan, we usually tell them to expect $2,600 in fees," says Cook, the mortgage broker. Most refinancers simply add the fees to their new loan balance and pay the loan off over time. Some lenders do offer a no-cost loan, but you pay a slightly higher interest rate.

Fees cover such services as document preparation and notarization, title insurance and paying off the old loan. Make sure you're getting a refinancing rate on your title insurance--which could be half the cost of a brand-new policy. You may be able to use an existing survey and save on that cost, too.