Low Interest Rates Are Inspiring Many to Repeat-Refi
Maria and Cesar Ramirez are refinancing their Granada Hills home for the third time in three years. In this latest go-around, the couple’s mortgage has an interest rate 150 basis points lower (100 basis points equals 1%) than their previous one, and by taking a somewhat smaller loan they save $500 a month in payments.
Esther and Jack Wolfe are refinancing their Chatsworth home for the third time in five years. They’re in the process of finalizing a 7.50% fixed-rate loan. The Wolfes’ savings will total $300 every month for the next 30 years.
The Ramirez and Wolfe families are part of a trend that local lenders and loan brokers are calling repeat-refis. Despite the hassle, expense and paperwork involved in getting a new mortgage, many home and condo owners are deciding that now is the time to lock into the lowest interest rates in 20 years.
The cruel irony, however, is that those who need to refinance the most can’t get a new low-rate loan approved because they’ve lost their jobs or because the equity in their home has plummeted.
Another impediment for many borrowers is the $2,000 to $5,000 in upfront costs associated with a refi. Homeowners who have a relatively small loan balance, or who plan to move in the near future, probably aren’t the best candidates for a new loan. Keep in mind, too, that every refi adds costs onto the base price of your home, and given the slump in housing prices, you’re unlikely to get back those new finance charges should you try and sell your home soon. Even if your monthly payments go down, of course, all the interest payments are still tax deductible.
Still, for just about everyone else who hasn’t refinanced their mortgage within the last 18 months, today’s low interest rates can yield substantial savings. The key is to get educated about what loans are available and how each loan would affect your bottom line. What’s impossible to calculate is where interest rates are headed. Fixed rate loans start at about 7.25% today--and adjustable-rate loans begin at about 4.25%.
People refinance for are all sorts of reasons. When the Ramirezes first refinanced their home in 1990, it was to add a room and consolidate two loans.
A year later they refinanced at a lower 8.75% interest rate and used their savings to build a pool. Now, they’re taking money out of low-paying savings accounts to reduce the balance of their loan. This third refi is a fixed rate loan at 7.25%.
The Wolfes bought their five-bedroom Chatsworth home in 1984 with a variable rate loan. In 1988, a 10.75% fixed rate loan seemed like a good deal. Then in 1991, the family paid $5,000 in fees to get a new 9.50% fixed rate loan. Now, the Wolfes are paying another $2,000 in fees to get a new fixed rate $200,000 mortgage at 7.50% interest. The Wolfes will recoup the upfront expenses quickly, though, with the monthly payment on their home reduced by $300.
Esther Wolfe considers herself lucky to be able to refinance. She’s an agent at Fred Sands Realtors in Northridge, and most of the clients she’s sold houses to during the last three years don’t have enough equity left in their homes to get approved for a new loan. She said, “It’s a precarious position to be in.”
Those who have lost a lot of home equity due to declining prices needn’t give up on the idea of lowering their mortgage interest rate. If the original lender has kept the loan as part of its own loan portfolio, there may be a chance of renegotiating, modifying or “working out” the loan with a lower interest rate. Loans that have been sold in the so-called secondary market to Fannie Mae or Freddie Mac may also be modified where the borrower can prove that continuing to pay the current loan rate is a “hardship.”
Another possibility for borrowers who have lost equity is to refinance with a lender who’s willing to approve a loan with a high loan-to-value in exchange for PMI--private mortgage insurance--which will pay your mortgage if you lose your job. PMI, though, will add about another 1/2% in interest to the loan rate for several years until the borrower’s equity makes its way back to the conventional minimum of 20% of the loan value.
Finally, borrowers with FHA loans may be able to take advantage of a streamlined FHA refi program where a drop in value of the residence doesn’t matter because the new loan doesn’t require a new appraisal.
For those interested in pursuing a refi, keep in mind that a mountain of paperwork is involved.
“There’s an aggravation factor involved, and you have to weigh that. Is it worth going through the process again?” said Shelly Klimusko, senior loan officer at Metrociti Mortgage Corp. in Encino. There are also plenty of fees.
Some mortgages carry upfront points of 1/2% to 2% of the new loan amount. There are also title insurance ($450 to $1,000), escrow fees ($300 to $500), a credit report ($45 to $50), a new appraisal ($250 to $500), search of tax records ($60 to $85), reconveyance fees payable to the old lender ($100 to $150) and recording fees ($50).
On average, Klimusko said, it takes three years to recoup these costs on a $350,000 loan, and up to seven years to recoup the upfront expenses on a $150,000 loan.
John Borkhuis, vice president and district manager at Chase Manhattan Personal Financial Services Inc. in Encino, said the firm’s mortgages average $600,000 and most of these larger borrowers see almost immediate savings. About half of the refis are being done with fixed rate loans, while the rest are opting for adjustable rates starting at 4.25%. These low-starter loans can see the interest rates climb as much as 200 basis points a year, with an interest cap of 10.25%.
Before deciding on the right loan, shop around, advised John Lucas, vice president and Van Nuys branch manager at ARCS Mortgage Inc.
“Unless the lender or the loan broker is going to take the time and make the calculations and give the borrower all the facts, that borrower should go elsewhere,” he said.
“Some lenders are more concerned with making a loan and getting a commission; borrowers should be careful of that.”
