Always the businessman, Charles David Moody Jr. of Atlanta was motivated to find a way to use falling interest rates to boost his disposable income. His decision: to refinance the remaining $450,000 on his 30-year, fixed-rate loan with a 7.25% interest rate through Atlanta’s Citizens Trust Bank. By refinancing to a 30-year, fixed-rate loan at 6.25%, the owner-operator of C.D. Moody Construction Co. Inc. (No. 92 on the BE INDUSTRIAL/ SERVICE 100 list with $30 million in sales) cut his monthly mortgage payment from $2,900 to about $2,200.
Moody plans to use the $8,400 he expects to save this year to expand his investments in stocks and help pay $25,000 in annual tuition costs for his 17-year-old son, Charles III, who plans to attend Morehouse College next year. Moody, 47, and his wife Karla, 46, a registered hospice nurse, are also saving to send their 16-year-old daughter, Karia, a high school sophomore, to college in another two years. “Refinancing has really helped us free up cash to pay toward tuition,” Moody says with a smile.
He cautions borrowers to make sure that they take any savings they realize from refinancing and turn it into an investment that will improve their financial outlook. “I wouldn’t take it and go buy a big-screen TV or some jewelry,” he says. “You want to use the savings on something that will bring you a good investment return or build value in an important asset.”
Moody is just one of a growing number of Americans who have jumped onto the refinancing bandwagon, a trend that is expected to continue throughout the year. Mark M. Zandi, Ph.D., chief economist and co-founder of Economy.com, says that more than $2.5 trillion in mortgages were refinanced over the last two years, and another $1.2 trillion in mortgages are expected to be refinanced in 2003, making up nearly 20% of all mortgage originations (refinances plus purchases) this year. The average rate on a 30-year, fixed-rate mortgage for the United States in 2003 is projected at 6.2%, according to the Mortgage Bankers Association of America. Millions of Americans have refinanced anywhere from one to three times since 2001, and Zandi suggests that there is still a fairly large pool of refinancing applicants in the marketplace. But experts say the refinancing stampede that hit record levels during the past two years will eventually slow.
Consumers who refinance stand to benefit in a number of ways. They can cut their interest rate, which reduces mortgage terms and interest expense and increases their overall cash flow. They can also take out built-up equity in their home to pay off outstanding debt, such as credit cards, or make home improvements to increase the overall value of their home.
When Lori Allen of Reeders, Pennsylvania, refinanced her home mortgage in January, it helped solve a number of cash flow problems. The 39-year-old financial assistant at Aventis Pharmaceuticals needed to pay off $4,500 in school, municipal, and property taxes that threatened to setback attempts to improve her damaged credit rating. Also, she wanted to delete other lingering bills that were squeezing her budget.
“It would have been hard for me to come up with $4,500 on my own,” says Allen, whose husband died of a brain aneurysm 10 years ago. “I’m a single parent in a one-income household, so had I not been able to refinance, it would’ve been hard for me to stay on top of my current bills. Now, I don’t have to play catch up.”
Allen refinanced the original $154,000 30-year, fixed-rate mortgage at 10.35% interest into a $175,000 20-year, fixed-rate mortgage at 8% interest. Although she signed the original loan agreement in 1999, she didn’t begin making payments until 2001 because the builder experienced significant delays constructing her home. Otis T. Harper II, senior mortgage officer for United National Mortgage Corp. in Easton, Pennsylvania, which issued the loan, says Allen’s refinance was more complicated than most. First, the refinanced loan amount jumped from $154,000 to $162,000 because Allen had to pay a substantial prepayment penalty for paying her initial loan back within 24 months. Harper then rolled the $4,500 in back taxes into the loan, added closing costs, and an additional $3,000 to pay off other personal bills.
Further complicating matters was Allen’s credit rating. “Her credit scores were kind of low,” says Harper, “so we offered her a mortgage credit program, which doesn’t take her credit card history into account. Instead, it looks at how you’ve paid your mortgage. If your mortgage history has no missed payments or payments that were 60 days late, we take that into account as to the kind of interest rate we can offer.”
Perhaps what helped make the loan
most possible for Allen was that her house appreciated in value from $175,000 to $225,000. Allen estimates that shaving more than two percentage points off her loan and shortening the payback period from 30 years to 20 years will save her $168,154 over the life of the loan. To help keep her credit rating blemish-free, she has elected to have the $900 biweekly mortgage payments automatically deducted from her checking account. Now, with the outstanding bills eliminated, her goal is to improve her credit rating over the next two years so that she can refinance again to a regular bank loan, which should carry an even lower interest rate than she has now.“The best part of this experience is that [United National] worked to see which program worked best for me,” says Allen. With her bills paid up-to-date, she says she can now afford to chip in with her mother to send her daughter D’neah, 10, to Sylvan Learning Center for additional tutoring to improve her grades.
If you are considering refinancing your current home mortgage, there are many factors to review before taking action.
EXPLORE OPTIONS WHEN FINDING THE BEST RATE
When you contact your lender, instead of only asking about the current refinancing rate, ask if it offers a “mortgage modification” option. This option can be offered if the lender still holds your mortgage in its portfolio and hasn’t sold it to another lender. It provides the benefit of a lower interest rate and lower monthly payment without having to extend the mortgage’s term, says Greg McBride, a financial analyst at Bankrate.com, which tracks rates nationally.
For example, mortgage modification could allow a borrower who has paid three years into a 30-year, fixed-rate $150,000 mortgage to refinance the remaining 27 years, not the entire 30 years. By refinancing over 27 years instead of 30 years you reduce the interest rate and lower the payment. This really benefits borrowers who paid into the loan for a short time and want the amenities that refinancing brings but can’t afford the higher monthly payments of refinancing from a 30-year, fixed-rate mortgage to a 15-year, fixed-rate mortgage.
Another perk with this option is that borrowers can often avoid out-of-pocket expenses since lenders already have their origination documents. But borrowers should be aware that “[mortgage modification] is good if you don’t want to take
extra cash out of the loan or tap into the equity,” McBride says. “It would not work for those wanting to take out equity or extra cash to pay off bills or make home improvements…then you’re looking at refinancing into a new loan.”For conventional refinances, be sure to do comparison shopping among lenders to find the best terms. Visit several local lenders to determine which offer the most competitive rates. You can also check rates locally and nationally over the Internet by clicking on Bankrate.com, Mortgage Select.com, Mortgage.com, and Mortgage101.com.
EXAMINE HOMEREFINANCING COSTS
The old adage that says you should only refinance to a new rate that is at least two full percentage points below your current rate may no longer apply. Refinancing costs have come down considerably,
courtesy of greater competition among lenders, more refinancing options for consumers, and new mortgage-financing technology. Consumers can often reap solid benefits from refinancing if the new rate is three-quarters of a percentage point below the current rate. Depending on your finances, experts say, consumers might want to finance out-of-pocket expenses into the new rate, thereby avoiding having to pay cash upfront to cover closing costs. In most cases, out-of-pocket costs, which include appraisals, home inspections, and legal fees, may equal about 2.5% of the mortgage amount, depending on where you live.
If you shop around, you can find many lenders that provide zero-cost financing to consumers, although they then charge a slightly higher interest rate on the loan. For example, a borrower refinancing a $150,000, 30-year, fixed-rate mortgage at 6% would have a monthly payment of about $899.33, with out-of-pocket expenses of roughly $3,000. But by increasing the rate by 0.25%, the lender could agree to pay 75% of the closing costs. That would leave the borrower with a monthly payment of $923.58, says McBride.
Perhaps the important thing to consider, if you’re planning on living in the home for a long period, might be to pay cash for out-of-pocket expenses to get a lower rate and monthly payment. That way you can enjoy the savings over a longer period of time. But if you only plan on living there for two-to-five years, it might make more sense to take the higher rate and payment by financing the closing costs into the loan. Financing those expenses into the mortgage might be particularly worthwhile if the refinanced loan is more than a full percentage point less than the current rate.
USE YOUR GOOD CREDITFOR A BETTER RATE
Borrowers with good credit ratings have the most leverage to bargain for the best rates. Those with credit blemishes, including such obstacles as bankruptcy, can still refinance, but likely at higher rates. Some borrowers with bad credit have options that may allow them to refinance. For example, some lenders allow consumers to obtain home loans or refinance mortgages on the basis of assets rather than credit rating. But because of the increased credit risk, these borrowers should be prepared to pay higher rates.
DON’T GAMBLE THAT RATESWILL FALL FURTHER
There is still time to refinance if you haven’t already. U.S. consumers who have refinanced since 2001 have already reaped $274 billion in interest rate savings alone, says Zandi of Economy.com. But don’t delay. Mortgage rates could move higher in the second half of this year, when many economists predict the economy will improve.
Remember that lenders still have a huge backlog of refinancing traffic so the closing process could take longer. “You should do it now because you don’t want to be on the tail end of that backlog and roll the dice that rates won’t move higher,” says McBride.
RefinancingResources
If you’re looking to refinance your current mortgage, Otis T. Harper II, senior mortgage officer for United National Mortgage Corp., says it’s best to take a proactive approach. “With mortgage rates so low, you can call any lender and it should have a number of products or programs that you can benefit from.”
There are a number of Websites that can help you find the best rates on refinancing in your area. They typically ask you to fill out an online questionnaire to help determine the type of loan that suits you. Then, within 24 to 48 hours, they promise to provide a list of lenders who are interested in refinancing your mortgage.
- Loanfight.com gives three rate quotes from lenders within 24 hours of filling out a questionnaire.
- Mortgageexpo.com receives quotes from a database of 800 lenders within 24 hours.
- VAresourcecenter.com specializes in veterans’ administration home loans.
- Lendingtree.com offers four rate quotes from top lending institutions, plus offers extensive information on mortgages.