Down with home-equity loans; you may be able to lower your monthly payment with a cash-out refinancing

Kiplinger's Personal Finance Magazine, March, 1998 by Joan Goldwasser

Mortgage rates are tumbling, but second mortgages -- better known as home-equity loans and lines of credit -- seem to be as impervious as the Rock of Gibraltar.

While the average rate for 30-year fixed-rate mortgages recently hit a four-year low of 7.05%, home-equity loans are stuck a lot higher -- recently about 9.5%. Home-equity lines of credit charge 9.7%, on average. Most home-equity loans are based on the prime rate, which has been holding steady at 8.5% since March 1997.

This suggests a change of strategy for homeowners who were planning to apply for a home-equity loan. A cash-out refinancing could provide the money you need and save hundreds of dollars a month in interest -- plus trim the rate on your first mortgage. You can also lower your payments if you've already racked up a lot of home-equity debt by folding both mortgages into one loan. HOW IT WORKS. Say you had a $150,000, 30-year fixed-rate mortgage at 7.5% on a $250,000 house with a monthly principal-and-interest payment of $1,048, and you were planning to apply for a $50,000, ten-year home-equity loan at 9.5% -- the recent prime rate plus one point -- with a monthly payment of $646. You'd owe $1,694 per month.

Now assume you applied for a cash-out refinancing for $200,000 at 7.5% -- a typical rate right now for a "zero-cost" mortgage, for which you pay a higher rate in lieu of discount points and closing costs. Your P & I payment would be 1,398 -- for a monthly saving of nearly $300. If you lowered your rate to 6 7/8% by paying closing costs -- either out of pocket or out of the proceeds of the cash you took out -- you'd lower your monthly P & I payment to $1,313 -- for a total monthly saving of $381. Closing costs on such a loan would be about $4,000.

Banks typically lend no more than 75% or 80% of a home's value with a cash-out refinancing. Some lenders have cash-out programs that will let you borrow more, but you pay for private mortgage insurance if your equity drops below 20%.

A cash-out refinancing works best if you're more concerned about lowering your monthly mortgage payments than paying off your loans because you're stretching all your home debt to 30 years. If that bothers you, consider a 15-year cash-out refinancing. If you pay closing costs, you can probably lock in a rate as low as 6.5%. In the example above, payments on a $200,000, 15-year mortgage at 6.5% would be $1,742. Or get the 30-year cash-out loan and make extra payments of principal.

You can perform what-if calculations at Kiplinger Online (at kiplinger .com, click on "calculators," then scroll down to the home section). To comparison-shop rates, check out Bank Rate Monitor's Web site at www .bankrate.com.

Lift tickets to go at the ATM

Skiers at four Lake Tahoe resorts no longer have to wait in line before they hit the slopes. At any of 550 Wells Fargo ATMs in northern California, they can buy vouchers for lift tickets (at a discount) and ski-lesson packages in advance. Next season those ATMs will report the latest weather and ski conditions, too.

Offerings at ATMs in other areas of the country are more mundane. You can buy stamps at Wells Fargo ATMs in ten western states, at First American National Bank ATMs in five southern states, and at Bank-Boston ATMs in New England. You can also pay with your Mastercard at those banks',atms that display a Cirrus logo. You won't pay an ATM fee, but you may pay as much as $6.40 for 18 32-cent stamps, and your own bank may charge you for using a "foreign" ATM. . He cares ab