The rewards of refinancing: take advantage of falling interest rates.

Homeowners may be able to cash in on falling interest rates by refinancing their mortgages. Thirty-year mortgage rates have dropped from around 9.3% in early 1995 to 7.3% in February 1996 (see chart). "It's time to lock in these rates," says Jane King, president of Fairfield Financial Advisors in Wellesley, Mass. "Borrow as much as you can, promising to pay back over 30 years."

As a rule, you need a two-point spread to make refinancing worthwhile. That is, if your present mortgage rate is 9.3% or higher, it makes sense to refinance at 7.3%.

"The two-point rule isn't always hard-and-fast," says Donald Brown, who spent 30 years in banking before joining Kelman-Lazarov Inc., a financial planning firm in Memphis. "In some cases, it's worth refinancing an 8% or an 8.5% mortgage." Cutting your mortgage rate by 1% saves you $500 in interest per year on a $50,000 mortgage and $1,000 per year on a $100,000 mortgage. Cutting the rate by 2% doubles that savings.

"Before you refinance," says Brown, "ask the lender what all the closing costs will be, including points you'll pay. Then compare the monthly savings to the total cost."

Suppose you're refinancing a $100,000 loan to reduce the interest rate by 1%, which would save you $1,000 per year in interest. Your total costs are pegged at $1,500. After a year and a half, you'll have saved enough to make up for the closing costs; from that point on you're ahead of the game. "The longer you intend to stay in a house the more refinancing makes sense," says Brown. "But if you expect to move within a year or two, refinancing may not be a good idea."

Start with your current lender. If your mortgage hasn't been sold and if your state permits, you may be able to simply "modify" your existing loan to a lower rate, paying a token fee of perhaps $100. Even if circumstances aren't quite that favorable, your present lender may offer you lower costs for appraisals, surveys, title insurance, etc.

However, don't stop with just one lender. "Shop around," King advises. "The terms of your mortgage may have a big effect on your future, so you should spend at least as much time as you would if you were looking for a new refrigerator." She says you should ask your financial advisor to help: "If a bank expects to be doing a substantial amount of business with that advisor, it may pay more attention to an application than to one that comes from an unknown homeowner."

Lenders are offering "no-fee" and "low-fee" refinancing but you need to be careful. Generally, there's a trade-off: if you take a low-cost deal, you'll probably pay a higher interest rate, perhaps 7.75% or 8%. "If you're in for the long term," says Brown, "you're usually better off with the lower rate, even if you have to pay more initially."

Prepare to spend 30 to 45 days going through the refinancing process. A late payment or two in your past probably won't be held against you. "However," cautions Brown, "if you frequency incur penalties because of late payments, lenders may consider you a poor risk."

Today, fixed-rate mortgages look more attractive than adjustable-rate mortgages (ARMs), because you can lock in at a lower rate. "Get your mortgage rate fixed for the long term," advises King, "even if the monthly payment makes things a little tight now. Over the years your income will probably grow, and a fixed mortgage payment will become a smaller portion of your cash flow.

PARING YOUR PAYMENTS

HERE'S HOW MUCH YOU'D SAVE IF YOU REFINANCED YOUR 9.3%,

30-YEAR FIXED-RATE MORTGAGE AT CURRENT INTEREST RATES:

INTEREST RATE       MONTHLY PAYMENT      TOTAL PAYMENTS

         OLD $100,000,30-YEAR FIXED-RATE MORTGAGE:

9.3%                  $826                     $297,468

              NEW MORTGAGE: 30-YEAR, FIXED-RATE:

7.3%               $681                        $245,862

              NEW MORTGAGE: 15-YEAR, FIXED-RATE:

6.8%                $882                       $159,410

Source: HSH Associates, Butler, N.J., 1996

RELATED ARTICLE: WISE WORDS

T. WALDEN EWING, AN ACCOUNT EXECUTIVE WITH M.L. STERN & CO. in Beverly Hills, Calif., explains the differences between front-end and back-end loads when investing in mutual funds. Front-end means that the sales charge is taken in advance. For example, if you invest $10,000 and the fee is 4%, you pay $400. Back-end refers to a declining percentage charge that is reduced annually, for example, 4% the first year and 3% the second year. You can get around these charges by investing in a no-load mutual fund. But be advised that all funds charge management and expense fees. "Regardless of what you choose, get started," says Ewing. "Mutual funds provide you with a smart and convenient way to participate in all sectors of the securities market."