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Honey, I Shrunk the Mortgage.

Rates are low, and seldom has there been a better time to refinance your mortgage. Here's how, step by step.

INTEREST RATES HAVE FALLEN TO SOME OF THE lowest levels in 30 years, and that has many homeowners wondering if they should refinance their mortgages. After all, who couldn't use some extra money every month, since refinancing your mortgage can greatly improve your cash flow? By refinancing your home at a lower interest rate, you can reduce your monthly mortgage payment--freeing up funds that could be used for investments, retirement savings or some other purpose. Furthermore, refinancing can save you tens of thousands of dollars in interest over the life of a mortgage.

So how do you go about it? Before you call up your local banker, it's important to do some numbers crunching to make sure refinancing makes sense for you.

Once upon a time, most experts agreed on this general advice: you should consider refinancing your mortgage when current mortgage rates are 2% less than your existing one. But that advice is far too simplistic. Homeowners have to be aware of the total cost of refinancing a mortgage. For some people, it may not be prudent to refinance, even if you can get a 7% rate and you're now paying 9O/o.

How do you know whether refinancing is really worth it? You've got to do the math and take into account that you'll be charged numerous fees--for title searches, appraisals, legal bills, etc. If these costs are excessive, or if you plan to move within a couple of years, you may be better off sticking with your present mortgage. These aspects of the complete refinancing picture have recently led some home financing experts to offer new guidelines.

James A. Lumley, author of How to Get a Mortgage in 24 Hours (John Wiley & Sons, $16.95) likes a variation on the old 2% rule, which he calls the 2-2-2 Solution. In this scenario, he says, refinancing may make sense for you "if the interest rate potentially available to you is 2% less than you are now paying, if you plan to stay in your home for more than two years, and if the refinancing charges don't exceed $2,000." Even using this criteria, Lumley cautions consumers to use the 2-2-2 Solution as a "thinking tool" rather than a hard-and-fast rule of thumb.

There's another way, in five short steps, to calculate the wisdom of refinancing:

1. Figure out what you pay for principal and interest today. Simply put, what's your current monthly payment (excluding taxes and insurance)?

2. Determine your future cost for principal and interest at a new and lower rate if all dosing costs are paid up front.

3. Estimate how many months you plan to own the property.

4. Divide the monthly savings created by a new mortgage into the cost of refinancing.

5. If the number found in item four is larger than the number of months shown in item three, go ahead and refinance.

Whichever method you use, a key question to also consider is this: what is your overall goal? Is your aim simply to reduce your monthly mortgage payments? Or, are you trying to cut the amount of interest you shell out over the duration of the loan? Keep in mind that whatever the amount of your original mortgage, you'll likely pay two to three times that amount if you stay in the house for the entire life of a 30-year mortgage.

For example, for a $150,000 loan at 7.5%, you'll pay a whopping $377,561 over 30 years--$150,000, the principal amount, plus another $227,561 in interest. If you're worried primarily about interest charges, you might think about getting a shorter loan, say for 15 years, or doubling up on payments--instead of refinancing.

That's exactly what William and Cheryl Brown did when they refinanced their four-bedroom custom-built home in Douglasville, Georgia, a suburb of Atlanta. They bought the house in early 1996 and originally had an adjustable rate mortgage (ARM) that fluctuated when interest rates changed. With the ARM, their rate went from a low of 8.5% to a high of just over 12%. They refinanced, however, in 1998 and obtained a 15-year mortgage at a fixed rate of 9%.

The Browns, who adopted their nephew Eric but are expecting their first baby in February, plan to live in their home for many years to come. They calculated that refinancing will save them more than $100,000 over the life of the loan. Cheryl, 34, who works in the healthcare field, says refinancing has given the Browns more money to do other things--like save for their new addition to the family. "We've made a nursery for the baby," she says.

The couple's mortgage payment, excluding taxes and insurance, ranged at first from $1,500 a month to as high as $1,800 a month. Now they pay $1,300 a month. "Our refinancing worked out very well," says William, 38, a software engineer.

As the Browns' experience illustrates, refinancing can save you a good chunk of money. But if you're not careful, you can also wind up paying a hefty price--too hefty a price in some cases when you go to refinance your home. How can you lose out if you're getting a lower interest rate? By getting dinged with a ton of lesser-known fees.

Here are the most common costs associated with refinancing. Taken alone, many of these items aren't that costly. But together, they quickly add up:

* APPLICATION FEE: A payment to the lender for processing the loan. Cost: varies and may be waived when refinancing with the lender who holds the current mortgage.

* APPRAISAL: An appraisal of the home is required by the lender to establish the property's value. Cost: $200 and up.

* CREDIT REPORT: A lender will examine your finances and charge a credit report fee. Cost: $30-$45.

* LEGAL: New financing requires a new title search, document preparation, and other legal and paralegal services. Cost: plan on paying for specific services according to local regulations and the requirements of your lender.

* LOAN ORIGINATION FEE: This is a charge the lender levies to grant the loan. The cost is usually 1% of the loan.

* POINTS: A point is equal to 1% of the value of a mortgage. Points are essentially loan discount fees. As an example: on a $100,000 loan with two points, you pay $2,000 in these fees.

* PREPAYMENT PENALTY: A charge contained in some mortgages to discourage early repayment. Such charges are limited in many areas of the country and are sometimes waived by financial institutions. Cost: from zero to a fixed percentage of the remaining mortgage balance or the value of interest for a certain time.

* SURVEY: In some cases, especially for a detached property, a lender may require a survey. Cost: varies.

* TAXES: Local jurisdictions charge recording fees to place documents in public files; others actually tax new financing. Cost: varies.

* TERMITE INSPECTION: May be required by lenders to ensure property is not infested with wood-destroying termites. Cost: $40-$60.

* TITLE INSURANCE: Lenders will commonly require title insurance up to the value of their loan. In the event the title is faulty--meaning there's a judgment, tax lien or some other encumbrance on the title--"lenders" title insurance assures that the party making the mortgage will be repaid. Cost: varies by location and according to the size of the new mortgage.

Now that you have an idea of what kinds of cost you can expect to encounter, it might be helpful to learn from some other experts on the subject. We talked with several homeowners who have recently refinanced their properties. Their stories provide insights into the refinancing process--and tell you what to look out for.

Roy Graham and his wife, Pauline, offer a lesson in the value of persistence. They defied conventional wisdom when they refinanced their home less than a year after buying it. "Our banker told us to wait for two years, but we decided to be audacious," says Roy. "We shopped around and found someone else willing to do it at the 11th month."

Roy, an ordained minister, and Pauline, a nurse, bought their home, a three-story, 100-year-old Victorian in the historic Cedar Park section of Philadelphia, in April 1997. At the time, Roy admits, the couple's credit "wasn't that strong." As a result, they got a mortgage with an 11.99% interest rate. When they refinanced in March 1998, however, they'd established a good track record of paying their mortgage on time. They secured an interest rate just over 9%--saving more than $100 a month in the process. Even though they had to pay a prepayment penalty to the bank that originally financed their six-bedroom house, it was worth it for the couple to refinance.

"It was an all-around good deal," Roy says, adding that their first loan was an ARM, while the refinanced loan is fixed for 30 years, allowing the couple to know exactly what their payment will be each month--regardless of swings in interest rates.

It didn't take Deborah Darrell long to refinance her mortgage either. Darrell bought a spacious, sunny one-bedroom condominium on Manhattan's Upper East Side in February 1997. Her original rate through a commercial bank: 8.5%. But this past June, she refinanced with a savings and loan society and obtained a rate of 6.5%--knocking off $250 in monthly payments. To refinance, she paid roughly $2,000 in fees, which were wrapped into the mortgage and will be amortized over the life of the loan.

Darrell, a 33-year-old vice president at a New York-based strategic communications firm, figures she'll remain in her prewar mid-rise condo for at least three to five more years.

"When interest rates dropped, I sought this refinancing out," says Darrell, who is single. But her refinancing didn't proceed without a hitch. She had a mortgage broker working for her--a middleman who'd shopped around for competitive rates and had guaranteed he could slash her mortgage payment by $300 a month. At the closing, in the midst of signing all the paperwork, Darrell saw a document saying the life of the new loan was 480 months--or 40 years--instead of the 30-year loan she'd requested. Since a 40-year loan tacks on considerable interest charges, she balked at signing the documents. Besides, "I thought it was totally unscrupulous," of the broker, she says.

Ultimately, the closing was rescheduled for another day--after new loan papers were drawn up to reflect a 30-year mortgage. Since the length of the loan was cut by 10 years, the $300 savings promised to her wound up being $250.

Still, "I knew it was a money-saving proposition for me in either case," says Darrell, whose total mortgage--including principal, interest, taxes and insurance--went to $2,000 monthly from $2,250.

"But people should be really careful about knowing the terms of any refinancing," she cautions, "not just how much you'll save each month or what the interest rate will be."

As these homeowners' experiences demonstrate, there is no one way to go about refinancing your mortgage. But if you do decide to refinance, here are five other valuable tips to follow:

1. Seek out loans without points. Lenders today know they have to be competitive to win business, so many offer no upfront fee or no-point refinancing deals.

2. Request a loan without prepayment penalties. If your lender insists on a prepayment charge, negotiate to include a clause that says prepayment fines will be eliminated after you've lived in the house for a certain number of years.

3. When it comes to title insurance, see if you qualify for what's called a "re-issue" rate. In cases where there has been a title search conducted in the past couple of years, many insurers offer a discounted rate and you may save anywhere from 10% to 20%.

4. Start with your present bank first, then check out a range of lenders. Potential home loan sources include Fannie Mae and FHA-backed lenders, mortgage brokers, commercial banks, S&Ls, private lenders and others. Although the people we interviewed all used new financial institutions to get refinanced, in general it's less complicated to go with the same lender.

Why? The process can be faster and cheaper because your current lender may forego, for instance, a credit check or a new appraisal of the property because they've already checked that information. Also important: your banker will probably be more flexible and willing to negotiate terms and rates if he knows he may lose your business to a competitor.

5. Finally, shop around and compare costs--don't just go with the one bank that offers the lowest interest rate. Remember: a low rate is meaningless if a host of other fees offset the financial benefit that a lower rate offers.

Fannie Mae spokesman David Thompson offers this advice: "We tell people to shop around so you get the best rate, along With the best overall terms." And, he adds, "with refinancing being as hot as it is right now, it's really a buyer's market out there."

"We did a lot of research for our new mortgage," says Cheryl Brown "and it really paid off."

Should You Refinance Your Home

Should you or shouldn't you refinance your mortgage? That's what this simple to use worksheet will help you determine using the following formula:
1. Current Monthly Mortgage Payment $--

2. New Monthly Mortgage Payment $--

3. Monthly Savings $--

4. Total Refinancing Costs $--
(Don't forget to include everything in your costs, including
points, legal fees, credit check, inspections, etc.)

5. Break-even Point (in months) --
(Divide Line 4 by Line 3. This is how many months it will take to
recoup refinancing costs)

6. Future Time In Home (in months) --
(Example: If you plan to live in your home for three more years,
enter 36 months)

Solution: If Line 5 is larger than Line 6, it's probably not worth
it for you to refinance. However, if Line 6 is larger than Line 5,
you should seriously consider refinancing your home mortgage.

7. Total Savings (Loss) to Refinancing $--


Using the worksheet, here is an example of what a homeowner would save if he refinanced:

Scenario: A homeowner is now paying a mortgage of $1,200 per month. If he refinanced, the new mortgage payment would be $1,000 monthly, for a savings of $200 each month. His refinancing charges would come to $1,800. That means it would lake nine months before the homeowner would break even. Since this individual plans to live in the home for at least three more years, subtract the lime it takes to break even from the anticipated slay and this homeowner could save $5,400--which makes refinancing a very attractive option. (The $5,400 savings = $200 a month in savings x 27 months [the length of lime in the home after the break-even point]).
1. Current Monthly Mortgage Payment $ 1,200

2. New Monthly Mortgage Payment $ 1,000

3. Monthly Savings $ 200

4. Total Refinancing Costs $ 1,800
(Don't forget to include everything, including points, legal fees,
credit check, inspections, etc.)

5. Break-even Point 9
(Divide Line 4 by Line 3. This is how many months it will take
to recoup refinancing costs)

6. Future Time In Home (in months) 36
(Example: If you plan to live in your home for three more
years, enter 36 months)

7. Total Savings (Loss) to Refinancing $ 5,400

Help Online

Fannie Mae

Fannie Mae, which handles one of every four mortgage loans in the country, also has a Web site you can use to find out whether it would be advantageous to refinance your mortgage. Click on the HomeRefinancePath. It helps you decide when to refinance and includes a calculator that lets you perform "what-if" scenarios using different interest rates and loan terms to calculate your savings.

Intuit Inc. www. quicken, com/mortgage/refinance

Intuit Inc., which markets personal finance software such as Quicken and MaclnTax, sponsors a Web site that includes a Q&A section on refinancing. It also gives individual state and national averages of mortgage rates, and has interactive tools that allow you to comparison shop for the best deal.

Chase Manhattan Corp. www. chase, corn

Chase Manhattan Corp. has refinancing information on its Web site. Select the mortgages and home equity destination and go to the mortgage home page. There you'll find a calculator that helps you determine whether to refinance.
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Article Details
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Title Annotation:mortgage refinancing
Author:Khalfani, Lynnette
Publication:Black Enterprise
Date:Feb 1, 1999
Previous Article:1999 executive recruiter directory.
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