BANKING & FINANCE: The numbers add up – It’s a perfect time to refinance

It’s no secret that news about the economy hasn’t been too rosy in the last few months. The nation’s unemployment rate is creeping back up, several sectors in the economy have slowed, income growth has cooled, and consumer confidence levels are coming down.

While it’s premature to start using the “R” word–recession–it’s the perfect time to use the other “R” word: refinancing. Borrowers who are interested in lowering their monthly mortgage rates, and have an extra 10 minutes to talk to their banker to determine if they’re good candidates for refinancing, owe it to themselves to compare the numbers.

The refinancing climate started to change last May, when mortgage rates started to fall after several months of steady increases. Alan Greenspan and the Federal Reserve Board provided even more momentum by slashing interest rates twice in the last few months. With the prospect for at least another rate cut by the Fed in the next few weeks, the climate for refinancing should remain excellent for the foreseeable future.

The trends already indicate that many borrowers are no longer sitting on the sidelines. The Mortgage Bankers Association of America’s refinancing index is at its highest level in 21 months. For those borrowers who may want to refinance, however, a few words of caution are in order.

For many, the lure of an on-line mortgage may be tempting because of interest rates of around 6.75 percent for a 30-year mortgage. But the lack of one-on-one contact you get from a bank or a mortgage company could hurt in the end. When looking into refinancing, the three main components to focus on are rates, fees and points. Many mortgage shoppers focus solely on the rates, and ignore the fees and the points. All three components require equal consideration to get a true analysis of the refinancing offer. A 6.75 percent mortgage might not sound so attractive if it also involves a $5,000 closing fee.

Though the economy is slowing, refinancing makes sense for many because their homes are a constant regardless of conditions. And if you can lessen your monthly payment, you’ve improved not only your own standing but the overall economy, as well, because you’ll have the ability to both spend and save more. It’s also a perfect mechanism for people who are facing a job slowdown or loss.

For example, a customer who received a 30-year mortgage for $100,000 at 8.625 percent six or eight months ago can turn around and refinance at 7.5 percent today, and end up with a monthly payment that’s $78 less. That’s nearly $1,000 a year in mortgage payment savings, which is an attractive number.

Refinancing is also a simple process, and not the ordeal that it once was. Just call the bank, and in 10 minutes or less we can tell a borrower if it’s worth their while to go forward with a refinancing. We’ll ask just four questions: how much you owe on the mortgage, what rate you’re paying, how many years remain on the mortgage, and how long you plan on staying in your home. Since the cost of a refinancing is generally between $1,000 and $1,500, you’ll need to stay in the home long enough to recoup the cost. In the case of the above example, by saving $78 a month it would take 19 months to recoup the cost of the refinancing.

Another option to consider is a “streamline” refinancing package that many lenders are offering. A streamline refinance can reduce your application-to-approval time and allow you to lower the interest rate you’re paying for as little as $250 by going through the same lender that originally wrote your mortgage. And, you can streamline your mortgage more than once by taking advantage of market conditions if interest rates continue to drop.

One more advantage of the lower rates that might be appealing to borrowers are home equity loans, which are loans taken against the value of your home. Borrowers who want a lower interest rate, lower payments, and cash for home improvements, vehicle purchases or debt consolidation can look to a home equity loan. These loans allow you to use your home as collateral so you can write off the interest on your taxes. Home equity loan rates have also dropped between one-half and three-quarters of a point in the last six months to a year.

Currently, homeowners with adjustable-rate mortgages, people who bought homes early in 2000 and loan holders who missed out on the refinancing boom of a few years ago should be contacting their banks and seeing how they can take advantage of this refinancing boom.

Patty Maxbauer is Assistant Vice President/Consumer Banking at Traverse City State Bank. She has 16 years of local banking experience as a consumer lender and mortgage specialist. You can reach her at 995-5510 or BN