It’s not too late to take advantage of cheap home mortgages. When rates edged up at the end of November, it looked like the refinancing frenzy was over. But by last week, 30-year mortgages were down to 6.84 percent and the boom was back. Mortgage bankers are issuing an astonishing $855 billion in new mortgage loans this year. In addition, about 6 million people will refinance $1 trillion worth of loans. “Loan officers are working triple overtime” to keep up with demand, says Phil Colling of the Mortgage Bankers Association of America.
To keep their lending business humming, bankers are making it easier and cheaper than ever for customers to refinance. Experts used to say that consumers needed to chop 2 percentage points off their rates to make refinancing worthwhile. Now, with computerized credit checks and a streamlined system for evaluating properties, banks can process new loans faster and more cheaply, and they are passing along the savings. In some cases, even a half percentage-point reduction can be worthwhile. Despite the welcome simplicity, there are still a series of decisions that challenge even sophisticated investors. Here are some tips on navigating the process.
Go short. For most investors, it’s hard to look beyond the tempting 30-year fixed mortgages. Why not lock in such great rates for as long as possible? But a new long-term loan can actually hurt borrowers who have spent years steadily paying off a mortgage. They might cut their monthly payments, but by extending the length of the loan, they’ll end up making extra payments when their current loan would have been paid off. For example, a borrower who has already paid off 10 years of a 30-year, $150,000 loan at 8 percent could refinance at 7 percent and save $225 a month. The extra 10 years of payments on the new loan will ultimately cost the borrower nearly $70,000 more than the higher-rate loan. As a result, homeowners who expect to stay put should consider a 15-year fixed-rate loan instead, says Gary Schiller, a Rockville, Md., mortgage broker. At 6.5 percent, the shorter loan would actually raise the monthly payment by $46. But over the life of the loan, the borrower would spend $40,000 less than on the original 30-year loan. Homeowners who want to buy themselves flexibility can take out the longer loan and fork over extra cash each month to pay it off early. That will give them the freedom to make lower monthly payments in hard times, but they’ll get a slightly higher rate than they would with the 15-year loan.
Homeowners who may be moving soon should consider so-called 5/1 hybrids, says Keith Gumbinger of HSH Associates, a Butler, N.J., mortgage-research firm. These mortgages charge a fixed rate for five years, then move to a variable rate. The initial rate is typically 0.87 percent less than a standard 30-year fixed-rate loan. The hybrids can cut the monthly payment on a $150,000 loan from $977 to $894, saving $4,980 in the first five years. Such loans are particularly good for families who are temporarily relocating for a job, but plan to sell the house and move back home eventually.
Keeping it cheap. It’s not just the rate that counts. Although many lenders have trimmed expenses, closing costs can still eat up as much as 2 percent of your loan amount. Borrowers are hit with bills for appraisals, credit reports, document preps, recording fees, title insurance and even photocopying and mailing costs. “A bank may quote you the best rate in town, but they may fee you to death,” warns New York mortgage broker Melissa Cohn. To keep fees low, shop for a lender that will estimate closing costs before you apply for a loan, and negotiate for lower fees, says Warren Myer, who runs BestRate.com. Borrowers can save up to 50 percent on their title insurance by asking to have their current policies reissued, instead of just taking the new policy that might be packaged with their other closing costs.
As many as one in four borrowers is opting for loans with no closing costs. But these aren’t necessarily such a good deal, since they charge higher interest rates. (These products have been around for a few years, but are newly popular.) A no-closing-cost loan typically adds 0.375 percentage points to the interest rate, so the longer you have the loan, the less attractive it looks. In three years of payments, a $150,000 no-closing-cost loan can add $2,000 in extra interest.
Those who are using refinances to get cash out of their homes should be most careful of all. Freddie Mac estimates that borrowers will end up with $80 billion more in cash–and a corresponding amount less in home equity–than they started with. A 7 percent, tax-deductible loan may be a nifty way to pay for a car or a college education. But with layoffs and attendant foreclosures on the rise, borrowers should be certain that they can keep up the payments. Or they can lose the whole house, and not just the Honda.
