Your Mortgage : Gulf Crisis Alters Refinance Tactics

Mortgage rates have dropped into the single digits, to one of their lowest points in more than a decade. Ordinarily, that would mean that it’s a great time for homeowners to refinance their loan.

But these are not ordinary times, and homeowners thinking of refinancing have found themselves in a quandary.

First, most economists expect mortgage rates to drop another half point or so over the next several months. So, you might save some money if you delay your refinancing until the spring.

But muddying the upbeat outlook for interest rates is the prospect of war in the Persian Gulf. If war breaks out and oil prices skyrocket, inflation will undoubtedly heat up and push interest rates higher--meaning that people who don’t refinance now would have to accept a higher rate later.

“I think that we could see rates drop to 9% by the spring, mostly because oil prices are dropping and the economy is soft,” said John Tuccillo, chief economist of the National Assn. of Realtors. “But if a shooting war erupts in the gulf, all bets are off.”

There’s even a new twist to the old rule of thumb that says it makes sense to refinance if the rate you would get on your new loan is at least two points lower than the rate you pay on your current mortgage.

“If you think the soft economy might cost you your job but you’ve got a comfortable amount of savings in the bank, it would probably be safe for you to go ahead and refinance if you find an attractive loan,” said Robert Van Order, chief economist of the Federal Home Loan Mortgage Corp.

“But if you don’t have much in the way of savings and the upfront costs of the new loan would eat up most of your cash reserves, you might want to delay refinancing until you’re a little more certain about the future of your job,” he said.

“If you get thrown out of work, you’ll need some money in the bank to tide you over until you find a new job.”

Van Order said much of the refinancing occurring today is being done by homeowners who are trading in their adjustable-rate mortgages for fixed-rate loans--even if the rate on their new loan is less than two points below that of the loan they currently have.

“A lot of people have ARMs with a rate of around 10 1/2%, and they’re trading them in for a 9 1/2% fixed-rate loan,” he said. “Even though they aren’t reducing their monthly payments by much, they’re eliminating the risk that’s inherent with any ARM--that their rate might eventually be adjusted upward.”

In fact, even people who recently purchased a house with an ARM with a low introductory rate might want to consider refinancing with a fixed-rate loan.

For example, say you bought a house eight months ago with an ARM that started out with an 8% “teaser” rate. It’s due to be adjusted to market rate at the end of your first year, which is only four months away.

When the rate is adjusted and the lender adds its margin, or “markup,” your new rate will probably top 10%. So, it might be a wise idea to refinance now with a fixed-rate loan at today’s 9 1/2% rate because the money you’ll save in the second year of the loan will easily offset the money you’ll lose by giving up the remaining four months you have at the 8% rate.

Of course, a key factor in determining whether you should refinance is the length of time you expect to stay in your home.

“It wouldn’t make sense to spend several thousand dollars in upfront fees to refinance if you’re going to move in a year or two,” Van Order said. “You’d probably have to stay in the house for at least three years before the monthly savings you’d realize from a lower-rate loan would offset the fees you’ll have to pay to set the new loan up.”

If you decide to refinance, economist Tuccillo suggests you ask your lender for a “lock-in” clause guaranteeing that the rate you’re quoted today is the rate you’ll actually get when the loan is eventually funded.

That way, you won’t have to worry if war breaks out and rates soar, because you’ll have the lender’s written promise to give you the rate you were originally quoted.

If you’re willing to gamble, though, delaying the refinance might pay handsome dividends.

“The long-term trend in interest rates is definitely downward,” said Gary Schlossberg, senior economist of Wells Fargo Bank.

“Even if war breaks out, rates will spike upward for a little while and then resume their descent. So, there’s really no reason to rush out and refinance now--you might be able to get a lower rate later.”

AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Jan. 4, 1991

Survey Conventional Mortages Adjustable Mortages Area 15 Year 30 Year Composite 1 Year Composite National 9.38% 9.66% 9.54% 7.79% 8.08% California 9.68 9.92 9.80 8.18 8.17 Connecticut 9.30 9.66 9.51 7.84 8.06 Wash. D.C. 9.22 9.54 9.40 7.39 7.76 Florida 9.39 9.68 9.54 7.72 7.95 Mass. 9.36 9.68 9.54 7.76 8.11 New Jersey 9.43 9.67 9.57 7.81 8.24 N.Y. Metro 9.46 9.73 9.62 7.87 8.22 New York 9.54 9.82 9.70 7.95 8.25 N.Y. Co-ops 9.77 10.00 9.96 8.22 8.65 Pa. 9.08 9.41 9.25 7.47 7.54 Texas 9.18 9.49 9.35 7.77 7.82

SOURCE: HSH Associates, Butler, N.J.