- The Washington Times - Thursday, December 7, 2006

Q:I have been watching rates drop over the past few weeks and am considering

refinancing our home and rolling in a loan on a time share we have.

I have read many times in the Home Guide that you recommend the “no-cost” plan that eliminates the closing costs in exchange for a higher rate. Our credit is great, but my husband and I don’t have a lot of income, at least not yet.

My husband’s salary is $75,000, and I have just started a business selling items via Internet auction. We are seeking a $575,000 loan with an interest-only feature to keep our payments down until my business gets going.

The property is worth at least $750,000. We applied for a “no cost” refinance and were quoted an interest-only fixed rate at 7.75 percent. One of your recent articles pointed out that no-cost refinancing should carry a rate around 6.25 percent. What gives?

A: In recent columns, I have been using 6.25 percent as the market rate as an example for a zero-cost refinancing on a $300,000, 30-year, fixed-rate loan program. Indeed, 6.25 percent certainly should be the market rate for such a program. In fact, as of this writing, I see that I could offer 6.125 percent, thanks to dropping interest rates.

You have provided me with enough information to surmise why your zero-cost quote is so much higher. Let me try to explain.

First, your loan amount falls into the “nonconforming,” or “jumbo” territory. Loan amounts that exceed $417,000 carry a higher interest rate. I see that a standard jumbo 30-year fixed rate will run about 6.625 percent. The borrower would have to pay the standard closing costs with this rate, which would run in the $4,300 range, depending upon the state in which you live.

As you point out, the zero-cost program will carry a rate that’s about 1/4 percent higher. There’s no free lunch with zero-cost refinancing.

Nevertheless, most homeowners are better off taking a slightly higher rate and eliminating $4,300 in sunken fees. Remember that closing costs are not tax deductible, but mortgage interest is, one of many reasons to consider a zero-cost option.

A jumbo zero-cost refinancing loan might run in the range of 6.875 percent for a fixed rate. Why were you quoted a much higher rate of 7.75 percent? There are several reasons.

First, most lenders will bump the rate slightly for an interest-only payment feature.

Second, I can predict that your loan officer is quoting a “no-documentation,” or “no-doc” loan, which typically carries a significantly higher rate. Don’t confuse a no-doc loan with the popular “stated-income” loans, which often carry little or no rate increase.

The difference is simple.

A stated-income program requires you to disclose your income on the application without verification. A no-doc loan states nothing.

Though your good credit might qualify you for a stated-income program, you cannot possibly “state” your income to any level that would qualify you for the mortgage requested without going well over the boundaries and into mortgage fraud — something you don’t want even to think about. Though there very well may be loan officers in the business who would encourage this activity, be assured that they are nothing short of crooks.

From looking at the rate quote that you received, it appears to me that your loan officer was recommending a program that is acceptable.

If I were to price out your loan request, I would have quoted a 30-year, fixed-rate, no-doc, cash-out refinancing with an interest-only payment feature at 7.625 percent.

I don’t see any programs with significantly lower rates that would accomplish your objective without pushing the legal and ethical envelope.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@ pmcmortgage.com).

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