- The Washington Times - Thursday, September 16, 2004

Q:I have a 30-year fixed-rate mortgage in the amount of $220,000 at 5.625

percent. I also have a home equity line of credit with a balance of $40,000 on a floating rate of 4.75 percent. I have a car loan and student loans totaling $35,000.

I am interested in consolidating all these loans into one mortgage.

I contacted an Internet mortgage company and was quoted a 5/1 ARM at 5.875 percent with interest-only payments.

The offer is based on a stated income approach because I am paid by commission, and my income fluctuates. It appears that this scenario will significantly lower my monthly obligations.

Is this something that you would advise?

A: You haven’t given me enough information for me to render any advice. I have owned a “bricks and mortar” mortgage company for 14 years, and your situation is typical of many folks trying to obtain a loan over the Internet.

I’m not trying to bash Internet mortgage companies — I’m sure a lot of good ones are out there. From my experience, however, borrowers who are unable to consult in detail with a professional are often lacking the necessary information to make the best decision. Let’s dissect your situation.

First, recognize that you are being offered an adjustable rate mortgage that’s fixed for the first five years. This will replace a 30-year fixed-rate loan. This isn’t necessarily a bad thing, but it’s important to know that the new loan will carry more risk because the rate can increase in five years.

Second, the rate quoted is higher than your current rate. Unless your auto and student loans carry very high interest rates, it hardly makes sense to refinance from a fixed rate to an adjustable mortgage with an even higher rate.

Furthermore, the rate offered is not competitive. At the time of this writing, I notice that the same interest-only 5/1 ARM with stated income underwriting can be found at a rate of 5.25 percent with no points.

Unless I’m missing something, 5.875 percent is high, to put it mildly.

This brings me to my third point: fees. You do not mention what fees are attached to this loan. Is it a zero-closing-cost refinance? Are there any points or origination fees? A rate quote without notice of the fees is useless information.

OK, I’ll stop there.

Now let me describe a couple of scenarios that could play out from two different decisions.

First, I would not advise refinancing to a 5/1 ARM at an above-market rate, so nix the Internet company.

Before you jump into a 5.25 percent 5/1 ARM, make sure doing so fits your situation. Look at two things.

First, refinancing to a 5/1 ARM probably is not wise if you plan on staying in your home for well over five years.

Second, check the interest rates on auto and student loans. If they are low, it doesn’t make sense to refinance.

Understand that the drop in your monthly obligations is largely because of the interest-only payment feature, not a result of lower borrowing costs. An interest-only payment is fine and dandy, as long as you know that no principal is being curtailed.

Your situation may be different. Indeed, I would advise refinancing to a low-cost 5/1 ARM at a competitive rate if you meet the following criteria:

• There’s a good chance you will sell within five years

• Your consumer loans carry high interest rates

• You have a particular objective of lowering your fixed monthly obligations, for whatever reason.

A thorough analysis will help you make a decision. Better yet, speak with a qualified loan officer who can help you establish your objectives.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail ([email protected]).

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