Reprinted from

By Carlos Tejada
The Wall Street Journal

In life, you don’t always let second chances.

But homeowners who missed out on January’s lucrative low mortgage rates just got one. A flight of capital away from Asian economic turmoil resulted Monday in a yield of just 5.58% for 30 year U.S. Treasuries (lowest since the 1960s and early 1970s). Mortgage rates, which tend to run a little more than one percentage point higher than the 30- year bond, followed it down. Wednesday, the average rate of a 30 year fixed rate mortgage was just 7.05%, down from last week’s rate of 7.11% and matching a five year low set in January, according to HSH Associates, a Butler, N.J., research firm.

While prognosticators differ as to whether rates will tall further, most agree the rate could hover around 7% for a bit. In fact, the benchmark 30 year Treasury bond yesterday gained 23%/32, or more than $7 for each $1,000 face amount, to push down the yield – which moves opposite to prices – to 5.689%

More than 40% of mortgage applications filed this year were for refinancings. Still, about 15 million households, representing $1.4 trillion in mortgage debt, continue to pay mortgage rates of 8%, or higher, according to the Mortgage Bankers Association of America. Some of those people are starting to think about a change. “The calls started four or five days ago,” says Joe Anderson, executive vice president, consumer markets, for Countrywide Home Loans, a mortgage lender.

But homeowners should consider carefully the ramifications of refinancing, as well as the different programs and loans available. To find the best loan, prospective borrowers should question both lenders and themselves. An important question for homeowners is how long it will take to recoup the upfront costs of refinancing through the lower rates of the new mortgage. The less the difference between the old mortgage rate and the new one, the longer it will take to realize any savings.

For example, a homeowner may want to refinance the $200,000 left on a current 30 year mortgage to get a rate of 7% instead of the current 8.25% Closing costs, including loan fees, would total about $4,000. A refinancing would reduce the monthly payments to $1,331 from $1,503. After about two years, the savings would cover the costs of refinancing.

Once the savings is determined, the homeowner has to decide if refinancing is worth the time and trouble. Though it doesn’t include such headaches of new home shopping as orange carpet and harvest gold countertops, refinancing has its own complications, including appraisals, lots of forms and tiresome meetings. “The real estate and mortgage business is simply in the Dark Ages, with all the reams and reams of paper. It’s not like changing your credit card,” says Michelle Maton, a Chicago certified financial planner.

Beware offers of “no-cost” refinancings. They allow the borrower to refinance without paying any cash upfront. However, the costs of closing the mortgage are either rolled into the principal of the new mortgage or computed into a slightly higher interest rate. If borrowers end up living in their houses for a long time, they can pay a lot more in the long run.

Consider the borrower refinancing a $200,000 mortgage at 7%. Under a no-cost loan, the borrower would roll the $4,000 in closing costs into the loan, raising the amount borrowed to $204,000. The borrower pays nothing upfront, but on a monthly basis will pay $1,357 instead of $1,331. That $26 difference isn’t much in the short run, but during the entire 30 year life of the loan the difference will total $9,360. Increasing the interest rate, usually by about three- eighths of a percent, has a similar effect. “There ain’t no such thing as a free lunch,” says Beau Brincefield a real estate lawyer and consumer advocate.

Mr. Brincefield and others agree that rolling in costs makes sense for people who don’t plan to live in their houses for more than a decade. That way, they don’t pay the full cost of the additional principal. Don’t be hasty to run to another lender. Your current lender may have your appraisal and other information on file and may want to keep your business. However, your original lender also may no longer hold your mortgage. Lenders sell loans on their book to other lenders and mortgage servicing companies, who may not know who you are, and may not give you a break.

And if a rate seems too good to be true, it probably is. Some lenders run “teaser” rates in local newspapers and advertisements that tout interest rates lower than just about everybody else is offering. That’s a red flag, Mr. Brincefield says. “Big fees are a back-door way of quoting low points or low interest rates. It’s so you can say, ‘Whoa! Midnight Burglar Loan Co. has a better deal!’ ”

Prospective borrowers should stick with companies that they are familiar with or that were recommended by other pleased customers. They also can ask for a HUD-1 form, which the U.S. Department of Housing and Urban Development requires lenders to show borrowers. The form includes a good faith estimate of each fee the lender will charge. Then the borrower can compare those fees with those of other lenders.

A refinancing also changes the borrower’s tax situation, altering the amount of tax deductible mortgage interest that is paid. Points, which borrowers pay upfront to reduce their interest rates, aren’t deductible immediately, says David Bradt, national director, financial planning services for Arthur Andersen LLP. While home buyers can deduct points paid in the year paid, refinancers must amortize the points over the life of the loan.

Higher income Americans also might see tax complications, Mr. Bradt says. Because of the alternative minimum tax, which applies to many affluent Americans, those who borrow more than they currently owe can’t deduct the additional mortgage interest.

Reprinted from The Wall Street Journal, Friday, June 19, 1998.