YOUR MORTGAGE : How to Tell If You Should Refinance

You may not have focused on it yet, but you could be a candidate for the home mortgage refinance mini-boom under way.

With fixed 30-year rate quotes near or below 8% in major markets--plus innovative “zero cost” adjustables in the 6 1/2% to 8% range--refinancing just might make sense for you and thousands of other consumers. But how do you know if you’re one of them? See if you fit into any of these categories:

--You bought a new home two or three years ago, when rates were close to historic lows, using a one-year adjustable tied to one-year Treasury bills. Even if your initial teaser rate was under 5%, your current--or soon-to-be announced--rate is likely to be 8 3/4% or higher.

--You missed out on the massive refi wave of 1992-93 because your household income had declined in the 1990-91 recession, perhaps because of a job loss or layoff. Or your home’s value--and your equity--had dropped because of the soft resale market early in the decade. Either situation could have disqualified you for conventional refinancing during the big boom.

--You obtained your mortgage sometime in the late 1980s, but because you had missed some charge card payments or were a late-payer several times on a prior mortgage, your current loan is in an impaired credit, higher-rate category. But now you’ve gotten better control of your finances, your sub-par ratings are history and there’s no reason for you to be paying off a mortgage at 9% or higher.

If you fit any of these descriptions--or even come close--you might want to start shopping in 1995’s little-publicized refi market. See what’s out there for the first category of borrowers--people with one-year adjustables from the 1992-93 vintage years. Say you bought a new house back then with an adjustable mortgage indexed to one-year Treasury bills. The start rate was an attractive 4 3/4%, the “margin” added to the index was 2.875%, and the maximum year-to-year rate increase you could experience was capped at 2 percentage points.

After the first year, your rate rose to 6 3/4%. After the second year, it jumped to 8 3/4%, where it is now. But with the one-year Treasury index at 6.2%, your fully indexed rate would actually be over 9% (6.2 plus 2.875) without the two-point annual rate cap protection.

So what’s in the market for you? According to the national rate-monitoring firm of HSH Associates, several hundred lenders around the country now offer fixed-rate 30-year loans at 7 3/4% or less. Keith Gumbinger of HSH says that a handful offer programs with rates of 7 5/8%.

“There are a lot of very hungry, competitive lenders out there just waiting for people to pay attention,” he said.

Bear in mind, however, that 30-year fixed rates in these ranges typically come with “points”--each of which is the equivalent of 1% of the new mortgage amount. Since your refi objective is to cut your net out-of-pocket mortgage costs as quickly as possible, the fewer points you pay the better.

In that regard, shop around for a zero-point, zero-closing cost alternative for your refi. They’re available from mortgage brokers and mortgage bankers in various markets. They work like this: In exchange for a rate that is slightly higher--generally 3/8% percent to 1/2%--than what you would pay for a loan that comes with points and closing costs, you get a loan with virtually no costs.

For example, Alexandria, Va.-based PMC Mortgage Corp. currently offers zero-cost adjustable-rate loans of $160,000 and up priced from 6 1/2% to 8 1/4%. The lowest-rate loan is a one-year adjustable tied to Treasury bills; the highest quote is on a “7/1” adjustable, which carries a fixed rate (8 1/4%) for the first seven years, then converts to a one-year adjustable.

Zero cost, according to PMC president Henry Savage, means: No points, no appraisal charges, no survey costs, no document preparation charges, no credit report fees, no title examination charges, no nickel-and-dime junk fees.

Refinancing out of an 8 3/4%, $200,000 adjustable-rate mortgage into a “5/1” zero-closing-cost adjustable with an 8% rate fixed for the first five years would save you $106 a month--$1,272 a year--with zero fees. Switching to a one-year adjustable at 6 1/2% would save you $309.26 a month--more than $3,600 in the first year--and cut your payments from $1,573.40 to $1,264.14.

Before leaping into such a refi deal, though, look hard at any potential downsides. A one-year adjustable, for instance, exposes you to a potential rate jump of 2% as early as 12 months after closing. Even Alan Greenspan couldn’t tell you what you’d be paying a year from now. Another issue: Does the new loan expose you to a higher lifetime or worst-case rate cap? Your current 8 3/4% adjustable may have a lifetime maximum of 10 3/4%. The new 8% adjustable could well carry a 14% max--a feature that just might not fit your financial comfort level.

Distributed by the Washington Post Writers Group.