Refinancing may keep the holiday spirit alive

This has been a challenging year for the real estate industry. Sales are down everywhere, prices are hurting and sellers are struggling.

Things are pretty rosy for the few buyers remaining in the marketplace, and the rest of us who own our own homes and aren’t trying to sell are left wondering what our homes are truly worth.

In all the years I have owned real estate, this seems like one of the bleakest, and totally out of step with the holiday season. Surely there might be a last-minute special delivery for good little boys and girls who owned their own homes and pay their mortgages on time.

Well, somebody must have left out fresh milk and cookies, because Father Christmas has left us a nice gift in the past couple of weeks.

Thirty-year fixed-rate loan programs have dropped to their lowest rate in over 30 years, and smart borrowers are refinancing in droves. You have to remember that I sold new houses in Gwinnett County to eager young buyers in the early ’80s for under $100,000, and then helped them apply for fixed-rate loans in the range of 17 percent interest. That’s not a misprint.

Thirty-year fixed-rate loans were in the 17 percent range during those times. And I also remember telling my wife that if we could ever refinance our home for any fixed rate under 10 percent, I would be contented forever.

I lied, and here’s the big news for you: If you own your own home and carry a mortgage of $50,000 or more at an interest rate of anything above 5.50 percent, you should seriously consider refinancing immediately.

At one point during the week before Christmas, long-term funding dropped to the lowest level seen in three decades, 4.5 percent. That rate included one point for origination and zero discount points. Closing costs for such a loan would probably run between 2.5 percent and 3 percent of the loan amount, depending on the amount you borrow.

Why am I making such a big deal about this rate drop? Because it can literally save you thousands of dollars in interest expense over the life of the loan.

For example, let’s say your remaining mortgage balance is about $200,000 and your current interest rate is 6.5 percent, with maybe 25 years of monthly payments remaining. Over the next three years, you will pay about $39,000 in interest expense to your lender.

But if you were to lock in a rate of 5 percent and refinance that same balance, your interest expense would drop to approximately $30,000. In other words, your closing costs would be paid back to you in just about two years, and all future savings would go into your pocket.

And you should know that the savings continue for the remaining life of the loan, although the difference is less each year as the loan balance falls. Because the savings are lessened on lower balances, it may not be worth your time or effort to refinance a balance of less than $50,000.

But even in that case, there is another option. It’s called the “zero closing cost” option. In this scenario, the lender pays all your upfront costs for you, including origination fees, Georgia intangible taxes, and attorney fees. In exchange for covering these costs, the lender asks that you accept a slightly higher interest rate, probably between ¾ and 1 percentage point on your long-term interest rate. The size of the rate differential depends largely on the amount you intend to borrow, with larger amounts costing less.

So in this type of loan restructuring, you could literally walk into the room, pay nothing, sign a few pieces of paper, then begin saving hard cash with each monthly payment thereafter.

While this turn of events is a winner for those I just described, it is nothing short of a home run for those who carry balances on credit cards or adjustable rate home equity lines. For example, if you are carrying a balance of $15,000 on a credit card and your card rate is a modest 15 percent, your non-tax-deductible interest expense for the year would be approximately $2,250, assuming you make minimum payments monthly.

But if you can include the credit card debt in your loan payoff, your expense drops to about $750 for that same amount of debt. And in addition, that interest now likely becomes a tax-deductible expense, simply because it is secured by your home.

On the downside, borrowers today are likely to encounter much more strict underwriting guidelines. And your credit score will have to be higher than was required just recently. In addition, an independent appraisal will have to document that your home is worth more than the amount you want to borrow.

But overcoming these hurdles will pay off, both now and in the years ahead. Yes, it is possible that long-term rates could get below what we are seeing now. But in reality, rates have a lot more room to go up than they do to go down, especially from here.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.