It’s Good Time to Switch to Fixed Rate

If your mortgage is in the 7 1/2% to 8% range, it’s time to start keeping a watchful eye on the nation’s money markets. With another drop of a tick or two in mortgage rates, you might want to consider refinancing.

Rates are already low enough for the millions of homeowners with mortgages of 8% or better to consider trading in their old loans. But there are nearly a million borrowers with loans up to half a percentage point lower, according to the Mortgage Bankers Assn. And if rates continue to decline (as some housing economists think they will), these borrowers could also become potential candidates for refinancing.

Borrowers who probably will benefit most from changing loans are those who got adjustable-rate mortgages within the last year or two.

Though these loans have been adjusted upward once or twice, rates on safer fixed loans have been inching downward to the point where there’s no longer much difference between the two.

“Some fully indexed ARMs are already at today’s 30-year rate,” said association economist Doug Duncan.

As a result, borrowers who opted for cut-rate adjustable loans because they couldn’t qualify for more expensive fixed-rate mortgages are being presented with a rare opportunity to limit their upside risk by switching loans.

“It’s hard to beat a 30-year fixed-rate mortgage right now in this interest rate environment,” says Adolfo Marzol of Fannie Mae, a major supplier of funds for mortgages. “It’s today’s hot product. People looking for that last nickel of payment savings may choose an ARM. But when you look at the difference between fixed and adjustable rates and do the math, it just doesn’t make sense to take on the added risk.”

Though recent borrowers are the strongest candidates for refinancing, those with older loans might want to weigh the possibility as well.

Normally, it doesn’t make financial sense for someone with a five- or 10-year-old loan to start over with another 30-year mortgage. Unless you can cut your mortgage rate considerably, paying all that interest all over again will probably wipe out whatever savings you achieve from lowering your rate.

But you don’t necessarily have to begin anew, at least not with a 30-year mortgage. Why not consider a 15-year loan? Rates on 15-year loans are even less than those on 30-year mortgages.

If a 15-year loan is too expensive--even at a lower rate, the payments are higher because of the shorter term--look for a lender offering 20- or 25-year mortgages. Most people don’t know that these kinds of loans are available, but they are, says Marzol. “And some lenders will price them somewhere in between” what they charge for 30-year loans and 15-year loans.

No matter how long you’ve had your present loan, however, you shouldn’t jump at the chance to cut your rate or curb your risk without first determining whether refinancing will be cost-effective.

To do that, figure out what the process will cost. You’ll have to pay for a new appraisal and credit report, and there will be another round of closing costs. The lender will have an assortment of charges, too; although in today’s highly competitive market, it’s entirely possible to find a lender--perhaps the one that has your current loan--that will waive most or all of these fees.

Next, determine how much you will save each month by lowering your rate. Now divide that amount into your total expenses. The result will be how long you will have to remain in your home--or keep the new loan--to recoup your costs.

Say, for example, that your out-of-pocket cost to refinance will be $2,000 and that by doing so, you will cut your monthly mortgage payment by $50 a month. Consequently, it will take 40 months to break even. If you plan to move before then, it doesn’t pay to refinance. But if you’re not going anywhere for several years, then refinancing is a smart financial move.

Of course, not everyone who should refinance can do so. Some people have gotten themselves into such financial difficulties since they were approved for their last loan that they can’t pass muster again. Others have seen the value of their homes fall to the point where they can’t borrow as much as they owe.

But even if everyone who could and should refinance in the coming months actually does so, it’s extremely doubtful that the rush will overload the mortgage delivery system as it did in 1987, when it took weeks to get through to some lenders; or in 1993, when widespread delays were caused by a shortage of appraisers and other processing problems.

1993 was “the mother of all refinancing years,” according to the bank association’s Duncan. About 6.1 million loans were turned back in that year, some by borrowers who refinanced two or three times in a 12-month span to take advantage of falling loan rates.

Still, a rush to refinance could prove troublesome for short-handed lenders caught looking the other way. So even if you are only thinking about refinancing, it pays to ready yourself for the process.

Start by obtaining a copy of your credit report to be certain it contains no erroneous information, and correct it if it does. Next, call a lender and find out what type of documentation he requires.

You won’t be able to gather some items, like current pay stubs and account balances, until you actually apply for a loan. But you can start putting together lists of checking and savings account numbers, credit card account numbers and other assets.

Whatever you can pull together beforehand will help to speed your application. So if rates fall only momentarily, you’ll still be able to take advantage of the opportunity that presents itself.

Distributed by United Feature Syndicate.

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Average Mortgage Rates and Indexes

Weekly Survey of 90 Southland Lenders as of Feb. 12, 1998 *--*

Latest One Week Six Months week previous previous Rates for loans under $227,150 30-year fixed 6.76%/1.99pt 6.79%/1.98pt 7.35%/1.90pt 30-year ARM start rate 5.68%/1.59pt 5.70%/1.59pt 5.60%/1.36pt 15-year fixed 6.50%/1.87pt 6.51%/1.88pt 7.07%/1.73pt Rates for loans over $227,150 30-year fixed 7.10%/2.03pt 7.14%/2.03pt 7.56%/2.03pt 30-year ARM start rate 5.71%/1.63pt 5.71%/1.57pt 5.71%/1.57pt 15-year fixed 6.84%/1.83pt 6.87%/1.82pt 7.36%/1.72pt FHA or VA mortgage average points 7.00%/1.45pt 7.00%/1.47pt 7.50%/1.71pt CALVET 30-year ARM start rate 8.00% 8.00% 8.00% 6-month LIBOR 5.625% 5.625% 5.813% 1-year treasury bill 5.280% 5.260% 5.590% 6-month treasury bill 5.040% 5.040% 5.210% 6-month certificate of deposit 5.540% 5.530% 5.730% Prime rate 8.500% 8.500% 8.500% 11th District cost of funds 4.963 4.949 4.853 For the month of Dec. ’97 Nov. ’97 June ’97

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Compiled by Mortgage News Co., Morro Bay, Calif.