Looking into refinancing

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Looking into refinancing

With mortgage rates at 35 year lows, it sounds like a no-brainer. Now's the time for many homeowners to refinance their home loans.

Even Alan Greenspan and the Federal Reserve have gotten into the rate-cutting business, lowering a key interest rate by a half-percentage point twice in January.

That's great for homeowners, but they'll have to use their brains to get the best deal and to decide whether any refinancing deal is right for them. "Just lowering your monthly payments doesn't mean you'll save in the long run," said Earl Peattie of Mortgage News. "In the end, you might end up paying more." Remember, despite the flashy ads and fliers touting no-fee and no-cost mortgages, there is no such thing as a free loan. Trade-offs are everywhere.

Here are a few tips for homeowners to consider before they refinance.

_Understand what you have and where you want to go.

What kind of mortgage do you have now? An 8 percent fixed-rate mortgage from last year? Or perhaps you missed the refinancing window in 1998.

Either way, you would be a prime candidate for refinancing.

"Anyone who has a variable with an interest rate of 8 percent or above or anyone with two mortgages that have a blended rate of 8 percent and above are primary candidates for refinancing," said Paul Scheper, a vice president at Aliso Viejo-based LoanLink.

How long are you going to stick around? Less than five years? Or perhaps you plan to stay in your house for decades. You need to have those intentions clear in your mind or you won't be able to figure out whether refinancing is worthwhile. Are you paying private mortgage insurance? Because home values have risen, you can probably get out of PMI by refinancing, Scheper said.

_Figure out the costs and benefits. Most lenders offer no-cost, no-fee loans, which require homeowners to pay nothing out of pocket. With the no-cost option, homeowners usually agree to pay a slightly higher interest rate than if they paid the costs and fees. Maybe you don't have the money upfront to pay the costs.

That's OK, if you will be getting a better rate than on your current loan. Just understand that you aren't getting the loan for free. Your trade-off for no costs is a higher interest rate.

If you do pick up the costs which usually run about ,000 or slightly less to cover appraisals, processing of title and escrow, etc. you should figure out how long it will take you to break even, or recoup those costs, said Randy Johnson, a mortgage broker in Newport Beach, Calif., and author of "How to Save Thousands of Dollars on Your Home Mortgage."

For example, you opt to refinance your 0,000 loan to 7 percent from 8 percent, which will save you about 7 a month, Johnson said. To get that rate, you must pay ,000 in closing costs. It will take you 18 months to recoup that ,000 you paid out-of-pocket.

If you plan to move out of your home in 18 months, paying the costs to get the lower rate wouldn't make sense, because you wouldn't be around long enough to regain your initial outlay.

Should I pay points? A good question. When you pay points, you're prepaying some of the interest on the loan. You're telling the lender, "I'm going to pay you interest ahead of time to get a lower rate," said Anthony Hsieh, chief executive of LoansDirect.com in Huntington Beach, Calif.

"Once you pay points, you have an investment" in the loan, Hsieh said.

To make this strategy pay off, a homeowner needs to stick around for the long term, he said.

Hsieh offers this scenario: A 0,000 loan with no points would get you a fixed rate of 6.875 percent. You would wind up paying ,182 a month.

Instead, if you pay 1 percent and your monthly payment is ,138. You save a month. You would recoup that initial investment in about 70 months.

"Stay in your home longer than that and it's all savings," Hsieh said.

So the homeowner who is in this for the long haul wins. The opposite holds true as well. If you leave before the break-even point, you lose that money. And, yes, people do pay points. Hsieh says about one-third of his clients pay points on loans.

_Know what happens to your loan when you refinance.

A no-cost loan makes it easy to refinance any time the interest rates on those products drop below your current rate. Yes, that lower monthly payment sounds attractive, but each time you refinance, you extend your 30-year loan, Hsieh said.

Sure, the loan amount is smaller and the rate is lower, but you're still stuck in that 30-year time period. You can refinance all you want at lower rates, but you start over each time, paying mostly interest for several years and only gradually attacking the principal. How do you avoid this? Shop around and see whether a lender will let you refinance in your remaining time period. For example, you've had your 30-year loan for three years. Find a lender who will let you refinance at 27 years, Hsieh said.

Consumers also can ask lenders for a free loan-amortization chart, Scheper said. It might sound scary, but it's not as complicated as it sounds. The chart will simply tell you how to accelerate your monthly payments so you can polish off that 30-year loan in 25 years. Check the Web for this, too.

Many companies put amortization schedules on their sites.

Another option is to refinance to a 15-year loan from a 30-year loan if you can afford it. The advantage is big savings down the road. Ask Pamela McKeehan, a speech pathologist in Orange County. She recently traded in a 30-year variable-rate loan that had moved up to 8.5 percent.

In its place, she took out a 15-year fixed loan at 6.75 percent. Before she refinanced, McKeehan was already kicking in extra money on her mortgage payment of ,560. Today, she's paying more a month. To get that rate, she paid 1.75 points and picked up closing costs for a total of ,000. "But it doesn't matter," McKeehan said, "because I'll save 0,000 (over the course of the loan). What's so great is that I'm going to have my house paid off in 15 years."

A drawback to the 15-year loan, besides its higher monthly payments? With its lower interest payments, you reduce your mortgage interest tax write-off. Check for prepayment clauses.

When you repay your loan early, investors who own those loans make less because they don't earn as much interest on the loan as they had expected.

Before you refinance, check your current loan documents to see whether you would have to pay a penalty for paying off your loan early. Before you sign your new loan papers, check for a prepayment clause as well, especially if you plan to move or might refinance in less than five years. Sometimes you can negotiate to do away with the prepayment clause if you accept a slightly higher interest rate or pay costs, Scheper said.

But make sure to ask. There are several ways these penalties are calculated. One method charges you six months' interest on 80 percent of your remaining balance. A 0,000 balance on an 8 percent loan would mean a penalty of about ,400, Scheper said. Should I wait until rates go lower? If you're sitting on the fence, know this: No one knows exactly what will happen with long-term mortgage rates.

When the Fed cuts lending rates, it directly and quickly influences short-term interest rates the ones you would find on credit cards and certain adjustable mortgage rates. Long-term mortgage rates, such as the 30-year fixed, track the 10-year Treasury bond, which is heavily influenced by the nation's long-term economic outlook. In general, long-term rates tend to move upward when the Fed cuts short-term rates, because bond traders worry that the Fed action could be inflationary.

Yet many experts project that rates will flatten out or go down slightly in anticipation of further Fed moves, but probably won't rise anytime soon.

Even if you believe rates will fall further, you still might want to refinance now with a no-cost, no-point loan, Hsieh and Scheper said. Just don't fork over any out-of-pocket funds. Then, if rates do fall, you can refinance again.

Now here's the twist. If you have an adjustable, you'll likely see those rates fall, because those are tied to short-term rates, which were just cut a half-percentage point.

_Ask around and shop around.

You can shop on the Internet for quotes. You can call around town and see what the competition is offering. But most experts agree that the best way to find a good deal and a good broker is to ask for referrals. "Talk to friends who have loans or who refinanced back in 1998," Johnson said. "Get recommendations." It also never hurts to do a background check.

By law, you have to be given a good-faith estimate three days after a loan application is taken. But most reputable lenders will supply you with a breakdown of costs and an estimate before the application, Scheper said.

If you're still confused about refinancing, check with a financial planner or tax professional. They can crunch some numbers and compare your loan options to let you know what you'll save in the long run vs. the short term.