Your Mortgage : It’s Time to Take More Than a Passing Interest in Refinancing
Readers are asking about refinancing, a new type of home-loan and those “mortgage-rate” charts that appear in The Times and newspapers across the country.
Claudia Jennings of Santa Ana has a 9.5% adjustable-rate mortgage that she has been paying on for the past three years. Now she’s thinking about refinancing with an 8.75% fixed-rate loan.
“It would cost me about $3,000 to refinance, but it would lower my payment by $75 a month and I wouldn’t have to worry about my ARM going up,” she writes. “Should I do it?”
There’s an old rule-of-thumb that says it’s a wise idea to refinance if the rate on your new loan would be at least two points lower than the rate on the old one.
If Jennings follows this advice, refinancing wouldn’t make much sense because she’s only reducing her rate by three-quarters of a point.
But don’t forget that other cliche: “Rules are made to be broken.”
If Jennings plans to stay in the house for a little over three more years, she’ll recoup the $3,000 she pays to refinance through her lower monthly payments ($3,000 divided by $75 monthly savings equals 40 months, or three years and four months).
Of course, money is only part of the equation.
“A lot of our borrowers have been trading in their ARMs and refinancing with a fixed-rate mortgage because they want to have a set rate for the life of their loan,” said Bill Jacobs of GN Mortgage Corp., a mortgage banker in West Hills.
“It doesn’t make much financial sense for her (Jennings) to refinance now. But if the ‘fear factor’ of having an ARM is so strong that she can’t sleep at night, she should go ahead and refinance with a fixed-rate loan.”
A number of readers have written in to ask for more information about the relatively new “two-step” mortgages.
A two-step loan is a cross between a fixed-rate loan and adjustable-rate mortgage. The loan starts out with a below-market fixed rate and adjusts only once--at the end of either five or seven years, depending on which type you choose.
The low introductory rate doesn’t just save borrowers money in the early years of the mortgage: It also makes the loans easier to get, because their lower monthly payment means the home-buyer doesn’t have to earn as much to qualify.
The two-step mortgage was introduced by the Federal National Mortgage Assn. a little over a year ago.
Although a spokesman for the agency says the two-step loans are now available through dozens of lenders in California and hundreds across the nation, Jeff Lawry of Oxnard says none of the institutions he has contacted knows anything about them.
“Can you give me the names of some lenders who make these loans?” he writes.
According to Fannie Mae, some of the biggest two-step lenders in California are Coast Federal Bank; Fidelity Federal Savings & Loan Assn.; Medallion Mortgage Co. and American Residential Mortgage Corp.
Also, Directors Mortgage Loan Corp.; Fronline Mortgage Co.; Western Bank Mortgage Co. and Western Sunrise Mortgage Corp.
Remember that rates and terms often vary from one institution to the next. So you’ll need to do lots of “comparison shopping” among lenders to get the best deal.
Julie Anderson of Torrance has been shopping for a loan lately, and she complained about a matter that other readers have occasionally griped about.
“The Times and some other papers I read print ‘mortgage-rate charts,’ but they are always inaccurate,” she writes. “The rates that are quoted are usually at least half a point lower then the rates lenders are offering.
“Why does your paper say one thing, and the bank says another?”
There are a few reasons why Anderson might be finding discrepancies between rates quoted in local newspapers and rates quoted by lenders themselves.
First, there are several services that provide rate information to local newspapers. If one service polls one group of lenders and another surveys a different group, you could have a quarter-point to half-point difference between the two even though they both did their surveys during the same time frame.
In addition, many of the services quote the actual interest-rate on the loan--the so-called “note rate”--while many lenders quote their loan’s annual percentage rate.
The APR is always higher than the note rate because the APR takes into account all the costs of setting up the mortgage--up-front points, origination fees and the like.
But my best guess why Anderson is finding a gap between the rates listed in the charts and the rates she’s being quoted by lenders is that she’s looking for a “jumbo” loan, but the rate charts she’s reading reflect rates being charged for smaller “conforming loans.”
A conforming loan is a loan that doesn’t exceed $191,250, a congressionally set ceiling. Lenders who make conforming loans often turn around and sell them to Fannie Mae or the Federal Home Loan Mortgage Corp., and “reinvest” the cash they get by making new home-loans.
By selling their loans instead of keeping them, lenders reduce the chance that they’ll lose money if rates eventually move higher. So, they can afford to charge lower rates.
A jumbo loan--sometimes called a “nonconforming” loan--is for more than $191,250.
Lenders can’t sell jumbos to Fannie or Freddie; they usually keep them in their portfolio until the loans are paid off. Since a lender will lose money if rates rise and it’s stuck with a bunch of lower-rate loans, it charges higher rates on jumbos than it does on conforming loans.
By the way, the chart that appears on this page every Sunday reflects the average rates that about 2,000 lenders are charging for residential mortgages in California and other selected parts of the country.
If you contacted a dozen different lenders, it’s doubtful that more than one or two of them would offer you a rate of exactly 9.08%, which the chart shows as the average for 30-year, fixed-rate loans in California.
But since 150 Western lenders are polled to compute the average, the chart can give you a ballpark estimate of what you’ll be paying. And perhaps more important, it can help you identify lenders who are asking for far higher rates than their competitors would charge.
Average Rates for Residential Mortgages
Average rates for residential mortgages as of Nov. 1, 1991.
Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 8.53% 8.88% 8.72% 6.59% 6.86% California 8.71 9.08 8.90 6.61 6.70 Connecticut 8.51 8.85 8.71 6.61 6.78 Wash. D.C. 8.44 8.76 8.62 6.41 6.87 Florida 8.50 8.87 8.70 6.42 6.60 Mass. 8.42 8.77 8.61 6.45 6.86 New Jersey 8.52 8.84 8.69 6.56 7.07 N.Y. Metro 8.56 8.90 8.75 6.63 6.98 New York 8.61 8.97 8.81 6.69 6.97 N.Y. Co-ops 8.75 9.17 9.05 7.15 7.62 Pa. 8.31 8.66 8.49 6.42 6.66 Texas 8.45 8.83 8.64 6.59 6.89
SOURCE: HSH Associates, Butler, N.J.
