Like many homeowners, Randy Whitchurch kicked himself earlier in the year when interest rates dipped, then rose again before he acted to refinance the mortgage on his Winnetka home.
”I was thinking, `Oh, they`ll continue to go down,` and then they went up,” he says.
But the capriciousness of the market gave Whitchurch a second chance at lower rates this summer, and this time, he acted quickly. ”Burned once, never burned again,” he says.
His application for a new mortgage on his home soon joined a flood of others in the Chicago area and across the country that may set a record by the end of the year.
So far this year, homeowners nationwide have traded in about $250 billion worth of old mortgages for mortgages carrying new, lower rates, according to the Mortgage Bankers Association.
Many mortgage bankers report that 60 percent or more of their business these days comes from homeowners refinancing their current homes, not buying new ones. Usually, refinancing accounts for about 10 percent of a mortgage banker`s business.
A costly process
Such frenetic activity is a sign that current low interest rates offer many homeowners savings on monthly mortgage costs that are too tempting to miss.
But refinancing a mortgage is no simple feat, and long-term savings often require significant upfront expenses.
Nor is approval a certainty. Tighter bank regulations have handed some surprised applicants rejection letters when they sought to refinance a house for which they easily obtained an original mortgage only a few years ago.
Anyone seeking to refinance their home should be prepared for at least the same arduous financial exercise they undertook to obtain an original mortgage, experts say.
”They make it so complex, it almost requires a lawyer,” says Whitchurch. Whitchurch, a financial officer of a Chicago area company, found that despite his expertise, refinancing his home was incredibly complex. Whitchurch, however, didn`t use a lawyer, and the consensus among experts and homeowners contacted is that hiring one isn`t necessary.
Sweet rewards
Complexities aside, refinancing an 11, 10 or even 9 percent mortgage can offer lucrative savings to a homeowner`s bottom line.
For instance, a homeowner with a $150,000, 30-year, 10 percent fixed-rate mortgage saves more than $400 a month in principal and interest payments if he refinances the same mortgage amount for another 30-year loan at 7.75 percent, according to Earl Warner, a financial planner at Gary N. Bowyer & Associates. But if a homeowner is concerned about long-term debt, not just monthly payments, current low rates make it possible to replace an existing 30-year mortgage with a new shorter-term, 15-year loan that will reap big savings in interest costs over the long term.
If a homeowner swapped a $150,000, 30-year, 10 percent mortgage for a $150,000, 15-year, 7 percent mortgage, he would pay about $32 more per month in principal and interest charges, according to Patricia Farruggia, a vice president at North Shore Mortgage.
Compared to a 30-year mortgage at current rates on the same $150,000, the homeowner with a 15-year mortgage would save a whopping $134,000 in interest payments over the life of the new loan.
But these ”bargains” do have their costs. Both rates cited in the above examples are for loans that carry 2 1/2 points, which are the upfront fees banks charge to lend money, expressed as a percentage of the mortgage amount. The $150,000 mortgages in both examples would require the homeowner to pay $3,750 in lending fees. (This doesn`t include about $1,000 in additional closing costs. More about those later).
In this example, it would take about a year for the homeowner to recoup the cost of the points with his new, lower monthly mortgage payments, according to Warner.
The zero option
Because many borrowers shy away from heavy upfront costs, however, many banks now offer ”zero-point” loans, which carry slightly higher rates than loans with upfront fees.
”Today, there are `zero-point` loans that we as mortgage brokers can offer,” says Rick Nash, president of North Shore Mortgage. When rates for mortgages with 2 1/2 points are at 7 3/4 percent, for instance, the rate on a ”zero-point” loan would likely be 8 1/4 percent, he says.
A homeowner with a 9 1/2 percent mortgage may find it worthwhile to refinance to obtain an 8 1/4 percent loan-only 1 1/4 points below his existing mortgage-if he can keep upfront fees in check.
The use of ”zero-point” loans, and the increasing use of a variety of adjustable rate mortgages, in fact, has helped retire an adage in the mortgage industry that homeowners should refinance their loan only when current rates fall 2 percentage points or more below their existing mortgage.
Because of these new devices, many homeowners are finding it cost effective to refinance when their existing mortgage is only a point or so above current rates.
”That old rule of thumb applies only to 30-year fixed mortgages with 2 to 3 points,” says Nash.
”With different products out there, I think it`s changed,” agrees Brian Chappelle, vice president at the Mortgage Bankers Association of America.
Creative refinancing
One Chicago area couple, in fact, creatively used zero-point loans this summer in a situation that is not uncommon in today`s real estate market.
John and Laura Wagner had set their sights on a new home in Hawthorn Woods near Long Grove, but hadn`t yet sold their existing home, Wagner related.
Rather than tie up the new house with a contingency contract, they decided to see if they could qualify to own both homes, knowing it would only be short-term.
North Shore Mortgage did find the couple a lender willing to finance the new home, but only if they obtained a 30-year mortgage. Wagner said he and his wife were trying to obtain a 15-year loan because of its overall lower interest costs.
Because they could only qualify for the 30-year loan, however, with owning both houses, the Wagners went ahead and obtained a 30-year loan at 9 percent interest, which carried no points. Two months later, after their old home had sold, they refinanced the mortgage to replace it with a 15-year, 8 percent loan, which also carried no points, Wagner said.
By containing costs in both closings with the zero-point loans (even though the loans carried slightly higher rates), the couple was able to buy the house they wanted with, eventually, the best mortgage for their needs.
”It didn`t cost us anything to close,” Wagner says. ”And with the timing of the rates, we got lucky. They went down 1 1/2 points during those 60 days.”
The couple did have to pay some closing costs for both transactions. For instance, they paid title fees twice, which amounted to about $900, Wagner says.
Anyone investigating refinancing their home may consider another option for keeping upfront costs low, which is unavailable to purchasers of new homes. Homeowners refinancing their mortgages may choose to roll the mortgage points into the mortgage itself.
For instance, if you need to borrow $100,000 to refinance your home at lower rates, and the desired loan carries 2 points, a borrower may ask to borrow $102,000 and carry the points in the loan amount itself, says Nash.
Bearing all costs
Refinancing a mortgage carries most of the same costs as an original mortgage, which usually total $1,000 in addition to any points on the loan, mortgage lenders say.
The difference, however, is that in the purchase of a new home, the seller shares some of the costs. In a refinancing, obviously, there`s no one else to bear the costs.
The biggest closing cost for most mortgages, besides points, is title insurance. On a $250,000 loan, for instance, title insurance costs about $450, says North Shore`s Farruggia. (Title insurance guarantees to the bank that there are no outstanding claims on your property.) In the purchase of a new home, the buyer would pay only $120 of that sum, with the balance paid by the seller.
Homeowners refinancing a home must often pay for a new appraisal, which may cost $250, in addition to a variety of other $50 to $100 fees for other items, Farruggia says.
A significant difference between purchasing a new home and refinancing an existing one is that the mortgage points are not immediately deductible on income taxes. Homeowners may take deductions for the points, but not the entire amount in the first year.
Heavy scrutiny
Anyone preparing to undertake a refinancing should be prepared for
”hundreds of phone calls,” says John Wagner, relating his experience.
”The document requests are continual through the process. First-time people have no idea they`ll get four to five calls a day for the first two weeks.”
Such scrutiny may be related to tighter lending guidelines that have led to some surprises for homeowners who thought a refinancing agreement would be automatic.
”We`ve had to turn down people because they didn`t pay attention to their bills,” says North Shore`s Nash, who advises anyone considering obtaining any loan to clean up their debts first.
