The Real Deal
Refinance? Keep an eye on the Fed in January
Rates on 30-year fixed mortgages dropped below 7 percent in late December, the lowest level since May 1999. With 30-year mortgages at 6.9 percent and 15-year fixed rates at 6.7 percent, homeowners are considering refinancing options. When the Fed meets again at the end of January, if the decision is to reduce the interest rate even further, you can bet the refi-market will be in full bloom.
There are pitfalls, however, to watch for when shopping for that new loan. You have probably seen the ads promising lower monthly payments with no upfront fees. At face value, such claims seem like a good deal, but are they? It is very important to do a cost comparison to see the full picture.
A good example is credit consolidation loans. Consumers carrying balances on multiple credit cards, for example, are sold on the idea of lowering their total monthly payment. What's not explained is the extra cost from accompanying changes in the interest rate, loan period and loan principal. All of these factors determine the "back-end" loan costs, which become more important the longer you keep a loan. If you do not know the total cost, including both short- and long-term charges, you cannot evaluate the real value of the refinance package.
One option for saving money over the life of the loan is to "buy down" the interest rate by paying points. Points are a one-time, upfront fee with one point equal to 1 percent of the loan amount. What the lender is offering is a trade-off: By paying more up front in the form of points, you can obtain a lower rate and ultimately save on long-term interest charges. What you have to decide before you elect to pay points is how long you plan on keeping the mortgage. If you plan on selling or refinancing within the next few years, points may not be your best way to go. Do the calculations for one, two and three years to see how the lower interest rate compares to the points you pay up front.
Another option to think about when refinancing is how you plan to pay for the fees associated with the loan transaction. Many people "finance the fees" as they don't have the cash available to pay the upfront costs. But by financing these costs, including points, your trade-off is a higher long-term interest expense, if you keep the property long enough. So, how can you find the best approach for your situation?
Obviously, carrying a mortgage with an interest rate of 6 percent instead of 8 or 9 percent seems like an easy decision to make, but before you sit down with your lender decide how long you plan on living in the house, how you will pay for the fees and whether points are a valuable option to you at this time. Doing a little homework now could save you time at the bank.
Information from Silicon Valley Association of Realtors. Send questions: Ask Your Realtor, c/o SILVAR, Los Altos District, 345 San Antonio Road, Los Altos, CA, 94022; call 650.949.9115; or send email to ppompei@siliconvalley-realtors.org.
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