May 28, 1999

Is it time to refinace again?

By TOM KELLY
The Real Estate Advisor

You just got through the headaches of refinancing less than two years ago. Now you receive a card in the mail from your lender stating that the 8.5 percent, 15-year fixed-rate mortgage you hold can be refinanced again at 6.5 percent with minimal fees.

Should you do it? Would you be throwing more money out the window in fees? Would it be worth the hassle of appraisals, credit reports and title insurance? Should you start all over again on a 15-year loan when you have 13 years remaining on your current loan?

The move would definitely pay off, but there are several important points to consider before starting the process, including:

• How long do you intend to stay in the home?

• Would the refinance process be worth the anxiety and stress?

Let's take a look at the numbers to see how much money would be saved.

The interest paid over the lifetime of a 15-year, $150,000 loan with an interest rate of 8.5 would be $115,879.68. The borrower would make 180 payments of $1,477.11 a month. Two years into the loan, the $150,000 balance would be down to $139,195, and the borrower would have paid $12,133.81 in interest.

Now let's refinance that $139,195 balance at 6.5 percent, adding in "minimal" fees of $1,605 so the package to be refinanced is $140,800. The interest paid on a 15-year, $140,800 loan at 6.5 percent would be $79,973.45, and the borrower would make 180 payments of $1,226.52 a month. Even if you added the first two years of interest paid on the old 8.5 loan ($12,133.81), refinancing would save the borrower $25,772.42, assuming both loans run full term.

Here's a good way to continue: The best way to save money would be to continue the payment that you had on the first loan ($1,477.11) on the second loan. That way you would pay off the loan faster and save more interest dollars.

A borrower who has the discipline to continue making the higher monthly payment of $1,477 would save more than $22,000 in interest over the life of the loan. In addition, the loan would be paid off after 135 payments, in 11 years and three months.

Remember, to refinance a mortgage you have to go through closing a second time and pay for many of the same reports and fees again. You might be able to get a break on some of the costs depending on your lender and when you last refinanced.

Homeowners often resent the costs, especially if they simply want to reduce their interest rate. Paying for title insurance again is one of their biggest gripes. But a new title policy must be done each time a property is sold or refinanced, even if an identical search was done a few months ago. This is to ensure that no new liens, such as home-equity loans, have been placed against the property.

From a financial point of view, paying off your home sooner with a higher monthly payment tends to limit other opportunities, especially if the market changes. But if paying off your home loan would make you saner than if you had not done it, then by all means do it. It would not be worth getting a few more percentage points on your money if it were invested elsewhere.

Are you thinking of refinancing to an adjustable-rate mortgage?

Again, the question is: How long do you see yourself staying in the house? If it's for longer than four to five years, a fixed-rate loan is probably the best choice.

With some 30-year fixed-rate loans carrying an interest rate of 7.25 percent last week, why take on an ARM at 5.5 percent that will be adjusted higher next year?

You might be asking how the interest rates on long-term loans got so close to the interest rates on short-term loans. Each lender you ask could give you a different answer. But when the "yield curve" is flat (the difference between long-term and short-term rates is less than 2 percentage points),consumers overwhelmingly choose long-term, fixed rates.

If you are thinking about another refinancing, weigh all costs and rates carefully before deciding. Make sure you understand "no fee" programs and calculate how long it would take you to repay the refinance costs.

Previous columns:

• Slow sale? Suggest a lease option, 05-21-1999
• Wamu to debut new mortgage web site, 05-14-1999
• NWMLS strikes deal on the Net, 05-07-1999
• HomeGain rapidly gains fans, 04-30-1999
• Reservists get help on home front, 04-23-1999
• National Realtors group to meet here, 04-16-1999
• Home offices and the IRS, 04-09-1999
• Tax relief That refinancing may offer, 04-02-1999