It may go down in history as the world’s shortest refinancing boom.
For a few heady weeks this summer, mortgage brokers were crowing about a refinancing renaissance set off by a sharp decline in long-term interest rates.
But, partly as a result of the Federal Reserve Board’s recent decision to leave interest rates alone, long-term rates have popped back up a bit, and the refinancing boom is quickly going bust. Once again, lenders and mortgage brokers are scrambling for business.
The end result is that lenders are offering a spate of no-point, no-fee deals to attract customers. These deals sound great, and they can benefit consumers uncertain about whether they’ll be able to qualify for a loan--or who only plan to stay in their current residence for a few years. But they can end up costing homeowners far more than they bargained for in the long run.
In these deals, the cost of the loan does not disappear, says Rick Cossano, executive vice president of Countrywide Mortgage in Pasadena. Instead, the costs of appraisals, title insurance and other loan fees are folded into the loan rate.
Normally, on a modest-size loan, the loan rate would be boosted by about three-fourths of 1 percentage point, he says. On a jumbo loan, the rate would rise by a smaller percentage, about one-half of 1 percentage point.
In other words, Cossano notes, instead of paying $2,500 in upfront fees on an 8%, $100,000 loan, you would have no upfront fees but your interest rate may amount to 8.75%.
The difference in the interest rate raises the payments by $53 a month. Multiply that over 360 payments on a 30-year loan and this borrower is paying $19,058 more in interest charges to save $2,500 in upfront fees.
Yes, the interest costs are tax-deductible, whereas simple loan fees are not. Still, the tax deductions cannot compensate for all the extra cost. And even if you took the theoretical fee savings and invested it wisely, you’d be hard put to make up the difference.
On a jumbo loan, the overall expense of going to a no-fee deal is far greater. A person with a $400,000 mortgage might face $6,000 in upfront fees (including points) on an 8% mortgage, for example. That person could eliminate those fees by paying one-half a percentage point more on the mortgage, going from 8% to 8.5%, which would boost the mortgage payments by a little more than $140 per month to $3,075.65 from $2,935.06.
Over 30 years, the $6,000 “savings” turns out to be a $50,614 cost.
But what if you want to refinance and don’t have enough money to pay the upfront costs? Usually, borrowers have the option of tacking the fees onto the loan amount. By and large, this is a far more cost-effective option than paying a higher rate.
Consider the borrower with the $100,000 mortgage: If he or she still pays 8% for the loan but tacks the $2,500 in fees onto the mortgage amount, the loan amount rises to $102,500, boosting the payments by roughly $18 per month--to $752 from about $734. Over 30 years, that costs $6,600--more than $2,500, obviously, but a far cry from $19,000.
On the jumbo loan, financing the $6,000 in fees would boost this buyer’s monthly payment by about $44, from $2,935 to $2,979. Over 30 years, that will cost $15,849--nearly $35,000 less than the overall cost of a no-point, no-fee deal.
No-fee deals may make sense, however, in cases in which borrowers are not certain they will qualify for loans at all or for people who plan to stay in their houses a fairly short period.
Say, for instance, that your house has declined in value and you don’t know whether the appraised value will support the new loan amount on a refinancing. Under normal circumstances, if you wanted to refinance, you could face roughly $300 to $500 in upfront fees for the appraisal and loan processing. If the value of the house has slid too far for you to get the loan, you’re simply out the money. By accepting a lender or mortgage broker’s offer to extend you a loan with no upfront costs, you shift the burden. If the house doesn’t appraise at the desired figure, the lender or broker pays, not you.
A no-fee deal would be the best choice for the homeowner with the $100,000 mortgage if he or she only planned to stay for two years after the refinancing. In this case, the additional interest charges would cost $1,272--$53 more per month for 24 months--which is tax-deductible, compared to $2,500--$1,228 more--in fees and points that are only partly deductible.
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1995 Mortgage Rates
Average for 30-year, fixed-rated mortgages in California, month closes except lastest:
Aug. 11: 8.04%
Source: H&H; Associates.