Each day for the past four months, Eric Roberts carefully watched the mystifying mortgage interest rate, wondering if the window of opportunity for refinancing his quirky turn-of-the-century Colonial was opening or closing.
The rate had been headed in the right direction, reaching a seductive two-year low early last week. Should he act quickly before it was too late? Or should he sheathe the pocket calculator and hold out for another plunge?Roberts knew something had to be done. The numbers on his current adjustable-rate mortgage crept up to 9 percent in June, and the hit in the wallet made him wince.
Now or later, Roberts?
Last Thursday, Roberts made the move. He called his mortgage company and locked in a fixed rate of 67/8 percent on a 30-year conventional mortgage, with none of those pesky "points" that require extra upfront cash.
"I had originally thought that if I could get below seven and a half I'd lucky," he said. "This thing will save me about $200 a month."
There are no Sooner-esque runs on mortgage offices like there were in 1992 and 1993, when loan officers worked around the clock to serve a pent-up demand created by plummeting rates and the economic recovery that followed the Persian Gulf War.
But with the current rates hovering near 7 percent, many homeowners still can benefit from refinancing their loans.
They include those who felt compelled to buy a home in late 1994 and early 1995, when interest rates were above 9 percent; those like Roberts who took out adjustable rate mortgages that rose over the years; and more than a few who can benefit from combining two loans into one refinanced mortgage.
There's nothing easy about the thicket that is home financing. But we'll take a stab at making sense of one of the more typical refinancing situations, with the help of Roger Harrington, a White Bear Lake, Minn., mortgage consultant who was Roberts' adviser.
Let's say Bill and Betty Bungalow took out a 30-year conventional mortgage in January 1995 at 91/4 percent and now want to take advantage of the current rate on the same type of mortgage, which we'll say is 71/4 percent, even though lower rates are sometimes available.
Assuming a $100,000 home loan, the interest rate drop of 2 percentage points means a savings of $151 a month, or the difference between the first mortgage's monthly payment of $833 and the refinanced mortgage payment of $682 a month.
But the Bungalows can't really bank that money because they can't write off as much interest on their income taxes as they could at their higher rate. Turns out their real savings is $89 a month.
Sort of. Even with none of the points that mortgage companies sometimes charge, it generally costs about $2,500 in cold cash to refinance at the lowest rate with zero points, covering such expenses as appraisals, credit reports, title insurance and a variety of other closing costs.
That's $2,500 that the Bungalows could invest in mutual funds, zero coupon bonds or their cousin Ernie's Jiffy Lube franchise if they didn't decide to do this crazy refinancing thing.
So, is refinancing really worth it? For most people, the answer is still yes.
That's because their equity in the home, meaning the stake they actually own, grows more rapidly at lower interest rates. With the equity growth making up for some of the $2,500 in closing costs, it will take only about 27 months before the closing costs are recouped and the Bungalows are pocketing or investing the $89 a month savings in mortgage payments.
Yet, there is an even simpler route for the Bungalows, and one that could require no upfront cash.
They can find a mortgage lender who will pay all their closing costs in return for a higher rate, say 8 percent. Because there still would be a 11/4 percent drop from the previous 91/4 percent rate, the Bungalows would save $60 a month right off the bat, after tax considerations.
Indeed, if the Bungalows don't plan on staying in their house for more than five years, the above option, called premium pricing, would save them more than the lowest rate because of the closing cost factor.
"The mortgage industry has changed," Harrington said. "The rule about waiting for a 2 percent drop, and your mortgage salesman's simple solutions, may not always be in your best interest anymore. People need to pinpoint their best financial approach and find the lowest-cost provider of that plan."
That approach could even be combining two different loans into one refinanced mortgage. The Bungalows could, for example, transform a 9 percent mortgage and a $20,000 bank debt at 103/4 percent into one refinanced mortgage at near 7 percent, assuming they have sufficient equity in the home, and walk away knowing they've done something good for the family treasury.
After a slow December in which candles and Christmas stockings took preference over thoughts of monthly payments and title insurance, business at Twin Cities mortgage companies is firing up with customers inquiring about the gamut of refinancing plans.
"We're starting to see some applications come through," Fran Fischer, a loan officer at Eastern Heights State Bank on St. Paul's East Side, said earlier this week. "A guy came in just today to refinance an ARM (adjustable rate mortgage)."
Harrington predicts a "steady to downward trend" in interest rates in the near future, so more home owners may once again question whether their rate is really as good as it could be.
They should not be dissuaded by the budget impasse in Washington, D.C., experts say.
The decision to put federal workers back to work last Monday will ease pressure on the Federal Housing Administration and the Veterans Administration, which guarantee many of the loans that the mortgage industry issues.
Local FHA employees, for example, faced a 900-case backlog when they reported to work Monday, but officials foresaw few problems that would trickle down to Bill and Betty Bungalow's search for the perfect loan.
Indeed, despite some reports of delays, most people encountered no problems getting loans while federal offices were dark, said Tom Birch, vice president of operations for Heigl Mortgage, Bloomington, and John Binger, a division director at the Twin Cities office of the U.S. Housing and Urban Development Department.
The layoffs created difficulties between the lenders and the insurers, such as the FHA, which require certain data before guaranteeing the loans. But the parties were confident that the budget problems would be ironed out, so they allowed borrowers to continue doing what lenders like best: sign on the bottom line.