Refinancing Roulette: The time is right for clients to consider refinancing their home

Want a mortgage service that's on your side?

Mortgage 1st

- Mortgage 1st Home
- Refinance
- Home Improvement
- Partners

Refinancing Roulette: The time is right for clients to consider refinancing their home

It's not only whether you refinance your home mortgage, it's how. Whether your clients are modest or wealthy, they're probably brooding over how to rescue shrinking investments. At the same time, they're also probably writing a monthly check for their home mortgages without giving any thought to how they can lower those payments. Even those who are on the ball and have noticed rates have fallen may be ignorant of the many refinancing options available. They may not realize much of the "conventional wisdom" of mortgages is no longer valid.

"We need to manage the red side," says Ben Utley, a planner in Eugene, Ore., who charges fellow planners to take a good look at debt management as well as asset management. Mortgage refinancing is no longer about squeezing an extra 25 basis points out of a bank, it's about an additional financial planning opportunity. The first decision to make is whether refinancing is advantageous. Planners agree that the traditional rule has been to wait until you can refinance at two points below your current rate. They also agree that this rule may be outmoded. Joseph J. Janiczek, a planner in Greenwood Village, Colo., adds up the closing costs and does a breakeven analysis. "Even a drop of less than 1% might be worthwhile," he said, although several other planners say they tend to look for a drop between 1% and 2%.

Doug Duncan, chief economist of the Mortgage Bankers Association of America (MBAA) in Washington, says, "If rates fall more than one point from where you are, it's worth taking a lookbut not if you're moving soon." Janiczek and other planners agree: With refinancing costs around 2% of the loan, there's often no point in doing it if you're moving in a couple of years. Janiczek advises clients to consider their position: Do they own local businesses and therefore are likely to stay put indefinitely, or are they high-level employees for a national company that may transfer them next year across the country?

However, Duncan says there are refinancing options for those likely to move soon, too, such as a five-year balloon mortgage: a competitive rate followed by payment of the principal at the end of five years. "This is good if you're sure you're moving, but otherwise it could be a gamble."

Still, once most homeowners have done the math and are ready to pursue a refinancing, they may feel that getting a low rate isn't enough: They must have the lowest rate. Even before shopping around, they wait for Alan Greenspan's next speech or the next set of government economic data, in the belief the news will lower rates even further. Again, planners agree that it's a myth that timing the mortgage market is any easier than timing the stock market. Joel Ticknor, a planner in Reston, Va., says, "You might as well use a crystal ball." Says Duncan, "If I could time the market perfectly, I'd be sitting on a beach instead of talking to you. If you have a good rate now, refinance now."

One possible option comes from Eric Rabbanian, a planner in Austin, Texas, who knows of at least one mortgage broker "who allowed borrowers to lock in a rate and, if another lender subsequently offered a lower rate, allowed the lender to jump to the lower rate at no fee." Homeowners may want to see if local lenders offer this benefit.

However, homeowners and their planners would do better to spend their time finding the best mortgage products from banks serving their region. Mortgages today are more than just rates, and come in more flavors than Baskin-Robbins. "In the past 10 years there has been an enormous increase in products," says Duncan. "There is no substitute for patience and spending time looking at options designed for personal needs."

Which is the best option? Like any investment product, the answer depends on your client's life and needs: What is the overall financial plan? Consider a client with little cash and high taxes attempting to scrape together ,000 for closing costs on a refinance. Can you make the bank absorb most or all of these costs? "If you want more deductions and you're cash poor, go for the higher rate but lower closing costs," advises Duncan. The client won't get as good a rate, but the interest garners a tax break anyway and spares what may be an already depleted savings account.

Bolder homeowners may be interested in adjustable rate mortgages. There are lots of ARMs "some with caps to avoid worst scenarios," says Utley. However, most homeowners are best with fixed-rate, "a no-lose game." In fact, a refinancing should be a chance to get out of an ARM, according to planner Paul S. Seibert Jr. in Sandwich, Mass. "They do and will increase," he stresses.

No matter what the client goes with, mortgage deals are eminently negotiable. Utley says banks can be very amenable to absorbing costs, especially for well-prepared homeowners who have their paperwork together and "can make life easier for the bank." He says that the basic rates will likely be the same from one institution to another, but the fees and levels of service can vary widely.

"Negotiate!" says Ticknor, who is also chairman of a local credit union. "I urge clients to look at local credit unions as a benchmark. For example, many lenders charge an origination fee, but my credit union does not."

Indeed, at closing, a client may have to come up with cash for county tax, transfer tax, title search, appraisal fees, origination fees"a whole litany of costs," according to Michael Boone, a planner and analyst in Bellevue, Wash. (Of course, homeowners first need to make sure their current mortgage doesn't have prepayment penalties.) Talk with more than one lender, says Duncan. "Lenders specialize. Even when they offer multiple products, some are inclined to push one particular product more than others," he says. "Ask them: What can you offer me?'"

Linda Barlow, a planner in Santa Ana, Calif., says her clients are shopping around. "Get a good rate and then go backyou can bargain. Maybe you can get them to absorb some of the fees."

Consider, for example, the 30-year fixed-rate mortgage, the plain vanilla arrangement everyone knows. Refinancing can be a chance to change it. Duncan and many other advisers point out that homeowners who have already paid 10 years into their 30-year may be better off switching into a 15- or 20-year mortgage. Ticknor points out that refinancing a 30-year loan typically starts the clock again at another 30 years, but "homeowners with enough paid in should look into 15 years." Sometimes there may be some advantages to continually starting again at year one, "but psychologically, people just want to end it," continues Ticknor, and a 15-year mortgage means they're done sooner, for less.

Finally, several planners also pointed out a bonus benefit of refinancing: The house may have appreciated since its purchase, allowing the homeowner to cancel expensive private mortgage insurance.

And that's just the beginning for Cynthia Martin of Scotts Valley, Calif., who has carved a unique niche for herself as a mortgage broker who essentially approaches every refinancing opportunity as a major financial plan. No detail is too small to be ignored. "I look closely at banks: Which institution is offering what products? And what are the client's issues? Recent divorce? Credit problems? A need for debt consolidation?"

These questions are more pertinent than ever. Martin says the country is in "one of the best mortgage markets in the past 25 years." The key is taking each client's needs into account. For example, one client had a relatively low income, but Martin found a bank that would give her the money she needed thanks to a great credit history. Is there a personal reason why a homeowner wants to get at the equity in his house? A refinance will help with that. But the refinance also has to involve credit counseling and life counseling. "Coordinate the whole family situation" with the mortgage, says Martin. "I use financial planning questions to find out what clients want: What is the payment tolerance? What are the goals? Is a couple planning a baby soon?" Seibert says the equity in a house is useful for purchase of "big ticket" items.

However, even after planner and homeowner have taken all the factors into consideration, the job isn't over until the paperwork is done. And that's where things can get sticky. "Watch the final papers," stresses Barlow. "One of my clients showed up to sign the papers and found the terms written down were not the ones she had negotiatedit was a bait-and-switch." This client got the lender to change the terms, but Barlow said some borrowers are so tired of the process they just sign anyway.

Of course, when the documents are signed and any fees paid, then the homeowner can just sit back and enjoy the new rates forever, right? Wrong. This is an ongoing process, says Utley. Twelve months from now, he says, it will be time to check the rates and the client's financial situation againand consider another refinance, another step in the debt management plan.