- The Washington Times - Friday, January 23, 2009

The media continues to fuel a rabid response from homeowners seeking to refinance and take advantage of the reported lowest mortgage interest rates on record.

As soon as I started writing this column, I opened up one of the nation’s largest Internet news sites. There it was in giant letters: “30-Year Mortgage Below 5 Percent.”

As usual, a quoted rate tells only half the story. I click on the report and read it. Sure enough, Freddie Mac, one of the large purchasers of residential mortgages, said the average 30-year fixed-rate mortgage fell to 4.96 percent. I continue reading and discover that this rate has 0.70 points attached to it.

I then check my best rates and am happy to discover that for folks with good credit and adequate equity, I could quote an even better rate with 0.70 points. However, that’s not the issue. The issue is that the cost associated with refinancing to a rate below 5 percent often offsets the benefit.

Don’t get me wrong. I’m very busy and I am locking in plenty of loans. However, I also have dozens of clients who are not jumping on the bandwagon because, even with rates under 5 percent, the numbers don’t make sense. Let me illustrate.

I have a stack nearly a foot high of papers on my desk that represents clients and would-be clients waiting to refinance. Almost all of these homeowners have good credit and sufficient equity in their homes to qualify for the best available rates.

Why then, are they choosing to wait? Because these folks currently have 30-year fixed-rate mortgages that range from 5.50 to 5.75 percent. Here’s a typical situation:

I have a client whose interest rate is 5.50 percent. The existing balance of the loan is $360,000 and the property is worth more than $600,000. His principal and interest (P&I) payment is $2,129 and he has 27 years left.

Let’s see if refinancing to a rate of 4.875 percent with 0.75 points makes sense.

Closing costs, such as charges for appraisal, settlement, recording fees, etc., will run about $3,500. Since one point is equal to 1 percent of the loan amount, a 0.75 point will cost the borrower an additional $2,700.

Let’s assume that the borrower doesn’t want pay the closing costs and points out of his pocket, so we add $6,200 to the mortgage balance, creating a new loan of $366,200. At 4.875 percent, the new P&I payment becomes $1,938, a difference of $191 per month. Does this make sense? There are a lot of ways to look at it.

First, without taking into consideration tax issues, simple math shows that it will take 32 months for the $191 monthly savings to pay back the $6,200 in cost.

Getting more complicated, I put these numbers in an amortization schedule and I see that it would take about 14 months for the loan balance to get from $366,200 to the $360,000 balance at the time of the refinance. However, I also see that if the client had not refinanced, his balance would be $352,000 in 14 months.

These numbers support what I have been preaching for 17 years: It usually makes sense to take a higher rate and keep the points and fees as low as possible.

Now let me turn the tables after today’s lecture. This, by all means, is not advice to wait or speculate that rates will fall. It is merely a suggestion that any homeowner considering a refinance understand how sunken costs can affect the deal.

On the other hand, if a homeowner has no plans to move, a refinance is certainly in order. The latest headline I saw boasted that 30-year fixed-rate mortgages fell under the 5 percent threshold for the “first time on record.”

There are a couple of old sayings that homeowners should remember. The first one is “pigs get fat and hogs get slaughtered.” Folks not planning to sell should not speculate on rates and go ahead and refinance. The other saying is “don’t try to catch the bottom of the falling sword, lest you lose your hand.”

Don’t get greedy. Remember that interest rates are at an all-time low. They won’t stay this way forever. Most analysts agree that the government’s decision to throw $700 billion into the problem is likely to cause inflation, which is certain to drive up mortgage rates.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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