Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 17, 1991 TAG: 9102150718
SECTION: BUSINESS PAGE: E-1 EDITION: METRO
SOURCE: Sandra Brown Kelly
DATELINE: LENGTH: Long
With mortgage interest rates falling below 10 percent, lenders are taking calls from people who want to talk about refinancing their home loans. Chris Yesawich, office manager at Dominion Mortgage in Roanoke, said he was having a similar experience.
Any time current mortgage interest rates are 2 percentage points less than the mortgage you have, it's ususally possible to benefit from refinancing.
A new booklet from the Federal Reserve Board and the Federal Home Loan Bank Board even suggests that a 1 1/2 percentage point difference is enough to make refinancing profitable when you balance the closing costs against the saving in monthly costs.
However, there still is a higher rule to follow in determining if you need a new home loan: Will a new loan make your money situation better?
For me, the answer was yes. So three weeks ago I decided to combine a small first mortgage and a large equity line in a new loan.
The lender who handled the loan said my case was fairly typical of what he is seeing.
I was one of those thousands and thousands of people who took advantage of a home equity loan a few years ago when banks wooed us with good deals.
The equity loan was a lifesaver, because I had a daughter to put through college and no cash reserves. An equity line of credit allowed me to borrow as I needed to pay college expenses and to update my house. The full amount of the interest was tax deductible, and there was a lot of interest since the equity line rate stayed around 12 percent.
The equity line of credit allowed my family to live comfortably for several years, but using it also made my monthly expenses creep up and up.
My equity line would be about used up at the same time my daughter graduated this year, which prompted this dilemma:
Do I continue to spend a good portion of my monthly income on mortgage and equity line payments, or do I refinance, get a lower monthly payment and have more cash to save or spend?
Dominion's Yesawich said many people are searching for a way to lower the amount they pay out every 30 days.
Deciding to refinance, however, was easier than deciding what kind of mortgage to get. There are a variety of 30-year, fixed rates available, each lower than the other depending upon how many points a person wanted to pay. A discount point, remember, equals 1 percent of the amount borrowed and requires a cash outlay up front.
Another option of 30-year loan is the "7-23" loan. This has a very low interest for seven years; the other day it was 8 percent. At the end of seven years, a borrower has the option of making a balloon payment for the remainder of the amount due or taking a 23-year mortage for the balance at the going mortgage rate plus 1/8th percent.
The "7-23" is touted as especially good for people who do not intend to stay in their current home any longer than seven years. That means it's popular with people who work for companies that like to transfer employees.
But my main criterion was to spend as little as possible getting a new loan and still get a reasonable interest rate.
And, even though experts like John Tuccillo, chief economist for the National Association of Realtors, have predicted that rates could go to 9 percent, I decided not to wait.
I chose a 10 percent loan with no points and no origination fee. And I promised myself that I would have no regrets if the rates fell lower. Which they did. Last week my same loan was available at 9 5/8 percent.
Membership in the Fannie Mae Time Saver Plus group - where my loan was assigned - is going to cost me about $1,200, but my monthly housing expenses are dropping more than $300. I would have done it for a lot less additional cash flow.
Refinancing isn't always a good idea, however, even when the spread between old rate and new rate is more than 2 percentage points. Frank Chrzanowski, vice president and area manager of Signet Mortgage, had an example of this. He said he met with a couple who were at the end of a 30-year, 11 1/2 percent mortgage and were were considering a new 9 percent loan.
The numbers didn't work for this couple, Chrzanowski said, because they were near the end of the old loan and most of their payment was going to principal. In the new loan, most of the payment would go to interest. When closing costs were factored in, the couple would have paid more for the same amount of money under the new lower interest loan than with the old one.
"But a lot of people are getting figures, checking up on rates and seeing if it works," said Chrzanowski, who estimates his office is getting from 20 to 30 calls a day about refinancing.
He said his ratio of new loans to refinance loans is about 50-50.
Chrzanowski, who also is president of the Roanoke Valley Mortgage Bankers Association, said other members of the association also report a lot of interest in refinancing.
Not everyone is looking for lower payments, however, said one broker. Some people are refinancing to get "cash out," using the equity in their house to get money to pay for an addition to the house, for instance.
by CNB