October 10, 1997

As interest rates dip, refinancing options abound

By TOM KELLY
The Real Estate Advisor

It's not just a coincidence. All of the multi-colored refinance material you received in the mail from a variety of lenders --some you have never heard of -- is designed to hit a groove.

That groove is a 19-month low in home loan rates and many lenders are eager -- some much more so than others -- to have you consider a refinance of your home mortgage.

Thirty-year, fixed-rated mortgages are holding steady in the 7.5 percent range with an average loan origination fee of 1.75 percent of the amount of the loan. Fifteen-year mortgages have been averaging about 6.95 with the same loan origination fee.

"The first thing we ask people is how long they will be in the home," said Pam Gavin, manager of consumer lending for Washington Mutual Bank. "If they are look at a brief period of time it may not make sense for them to go through the refinance process."

Gavin is correct. Will the money you save on monthly payments really make up for the cost of refinancing? The figures indicate the answer is yes -- some months down the road. But what else could you do?

The exciting idea of lowering your monthly mortgage payments by refinancing can quickly be washed away by the empty feeling that you'll have to start all over again. It's truly unnerving to set back the hands of the 30-year home mortgage clock and the decision should never be taken lightly.

Unless you are strapped with an immediate need for a large sum of money, for example a medical emergency or pressing family need, the decision to refinance should definitely be based on how long you will be in your house.

If you are going to be there fewer than three years, the loan fees and other costs, time and inconvenience may outweigh the lower interest rate on your new loan. And even if you are going to stay in the house longer, look at these options before starting a 30-year commitment all over again:

n Lump-sum prepayment: Financial advisers say their not-so-thrifty clients should take the money they would pay in refinancing fees and apply the cash to the loan principal. The money would pay off the original loan faster and save interest.

This will make a lot of sense when you look at the Internal Revenue Service 1098 form that you receive from your lender. This form, which shows annual payments to principal and interest, showed one reader she paid five times more to interest than principal.

The big tax deduction eases the pain and it is significant. However, remember that home-loan interest deductions simply reduce your taxable income. They are not dollar-for-dollar tax credits that can be subtracted from your tax bill. If you have a $1,000 a month mortgage payment (approximately $135,000 at 8 percent interest over 30 years) and are in the 15 percent tax bracket, only about $150 a month escapes being taxed in the loan's early months.

n Home-loan acceleration computer programs that show you the cost-effectiveness of various options are now common in the mortgage market. The first local offering was developed by Puget Sound entrepreneur Ethan Skyler, who was so shocked at the amount of additional money it cost to finance a tractor that he wrote a software program to illustrate the difference. His CompuLoan (1-800-622-1984) has been available since 1986 and he's sold more than 5,000 programs. The other acceleration programs available range from a basic amortization schedules provided by not business software applications to complex mutual fund and annuity options available from MONY 1-425-462-8066).

n Biweekly payments: This is basically a prepayment method that calls for two payments a month instead of one. By making 26 biweekly payments instead of 12 monthly payments, the borrower makes what amounts to an extra monthly payment. This payment goes directly to the principal portion of the loan, greatly reducing the term and interest payments.

Several biweekly programs are available, some offered by local banks if you accept a refinance. For example World Savings' (several locations) primary residential loan product is an adjustable-rate mortgage with a biweekly option. An Edmonds company specializing in biweekly payments is Mortgage Management (771-2093).

n Monthly Do-It-Yourself: You can accomplish this program yourself. Most banks will accept prepayments at any time. On your monthly mortgage coupon, there's usually a space for extra amounts paid to principal. Discipline yourself to add extra cash each month.

See if you can add enough in 12 installments to equal an extra month's payment. Biweekly companies are simply betting you can't discipline yourself, and therefore, you need their services.

n A 15-year mortgage: This has become a popular alternative to the 30-year loan, especially for second-time buyers and over-30 re-financiers who can afford higher monthly payments. These loans carry interest rates about half a percentage point below the 30-year fixed rate.

I'm a pay-it-off person. I've always thought 15-year loans were great because you can own the roof over your head in half the conventional loan term. Any financial advisor will tell you that any dedicated retirement savings plan only kicks in to gear when your home is paid off. Kick your mortgage out of the way as fast as you can. The savings -- and feeling -- will be overwhelming.

Previous columns:

• Feds clean up Fair Credit Reporting Act, 10-03-1997
• JLS being 'proactive' with Costco deal, 09-26-1997
• Home businesses are changing our homes, 09-19-1997
• Area housing market: how hot is it?, 09-12-1997
• First-time buyers need creativity, 09-05-1997
• Don't expect mortgage rates to move much, 08-15-1997
• How wired will real estate get?, 08-08-1997
• Taking a look at The Street of Dreams, 08-01-1997